2022
Banner Corporation
Annual Report
Harnessing our momentum
Serving our clients,
communities and
colleagues for 132 years
• $15.83 billion in assets
• Serving eight of the top 11 largest western Metropolitan
Statistical Areas (by population)
• A Forbes World’s Best Bank for the third consecutive year
CORE EFFICIENCY RATIO
70%
63.59%
61.18% 60.76% 60.22%
57.99%
60%
50%
40%
30%
20%
10%
0%
2018
2019 2020
2021
2022
Core efficiency ratio defined as adjusted non-interest expense
divided by adjusted revenue. Adjusted revenue excludes net
gain (loss) on sale of securities, fair value adjustments and
the gain on sale of branches. Adjusted non-interest expense
excludes merger and acquisition related expenses, COVID-19
expenses, Banner Forward expenses, amortization of core
deposit intangibles, REO operations, loss on extinguishment
of debt and state/municipal business and use taxes.
DEPOSIT PORTFOLIO
49%
2022 Total Deposits:
$13.62 Billion
46%
Interest-bearing
transaction and
savings accounts
CDs
Non‐interest
bearing deposits
5%
TOTAL SHAREHOLDER
RETURN PERFORMANCE
$200
$175
$150
$125
$100
$100.00 $100.05
$109.07
$137.28
$128.09
$95.40
$127.53
$118.71
$100.00
$75
$82.51
$102.20
$93.33
$50
$25
$0
2017
2018
2019
2020
2021
2022
Banner Corporation
KBW Regional Bank Index
NOTE: Assumes $100 invested in BANR common stock and
other index at the close of business December 31, 2017 and
that all dividends were reinvested. Information for the graph
was provided by Bloomberg LP, New York City, NY.
CORE DEPOSITS
BY BRANCH (MILLION)
137 BRANCHES
$100
$90
2022 Core
Deposits:
$12.90
$80 Billion
$70
$94
$90
$75
$60
$50 $45
$40
$50
$30
$20
$10
$0
2018 2019 2020 2021 2022
Dear Fellow Stakeholders,
Sir Isaac Newton’s Laws of Motion were certainly in effect this past year at Banner.
Our nearly 2,000 employees remained in productive motion toward ensuring we
are a consistently high-performing company, creating a virtuous cycle of upward
mobility that supports all stakeholders. Despite navigating economic uncertainty
and a rising-rate environment, we harnessed tremendous momentum to deliver
exceptional results. Notably, we generated $195 million in net income and
delivered a total shareholder return among the top quartile of our proxy peers.
Our experienced employees delivered record revenue, a record efficiency ratio and
record core loan production among other significant achievements. We attribute
that success to consistently implementing our super community bank strategy, an
expanding net interest margin, and crisp execution of Banner Forward.
Super Community Bank Strategy
As with past years, we generated solid core operating results and profitability by
balancing the needs of our clients and community with that of the organization.
The foundation of our approach remains fostering new, and deepening current,
client relationships across all segments of our company. Our clients affirmed their
trust in us by continuing to choose Banner for advice and guidance, competitive
products and services, and our client-focused delivery channels.
Exceptionally strong core deposits remained a fundamental key to our success,
accounting for 95 percent of our total deposits at year-end. This allowed us to
maintain high levels of on-balance sheet liquidity, an important element of our
moderate risk profile. In fact, we were well above most of our peers in this area.
In turn, we utilized those abundant low-cost deposits to fund another year of solid
loan growth. Several segments generated historic loan production, including small
business and consumer, commercial and business banking, and affordable housing.
It’s noteworthy to mention our team accomplished double digit loan growth while
further diversifying our loan portfolio (see inside back cover for details).
Net Interest Margin
With an asset-sensitive balance sheet, last year’s loan growth and higher yields on
interest-earning assets led to the expansion of our net interest margin. In fact, our
margin grew at a faster pace than many peer banks, thanks to our steady low-cost
deposits and strong client relationships. On a tax equivalent basis, we ended 2022
with a 4.23 percent net interest margin in the fourth quarter and 3.68 percent for
the full year, compared to 3.39 percent the previous year.
Banner Forward
Another important element of our 2022 results was the successful implementation
of Banner Forward. Initially launched in 2021, Banner Forward is our reimagined
strategic planning process with a heightened focus on enhancing revenue growth
and investing in innovation to improve back-end processes and reduce operating
expenses. By year-end, we implemented more than 90 percent of our originally
identified 73 initiatives, generating the anticipated results. While we completed
most of our efficiency-related initiatives, we expect the revenue initiatives to
continue into 2023 with long-lasting benefits to our operating performance and
productivity, including:
• Taking greater advantage of our strengths with more efficient product and
service delivery through additional technology solutions, while continuing to
utilize the exceptional strengths of our knowledgeable bankers.
• Introducing several new and expanded products and services to further improve
our clients’ experience and continue adapting to their evolving needs and
expectations, while creating new opportunities for revenue growth.
• Reimagining processes and realigning resources to improve responsiveness—
some of the most impactful in the commercial loan application and approval
processes—further heightening our competitiveness.
President and CEO
Mark Grescovich
CORE REVENUE
(MILLION)
$700
$600
$512.0
$623
$580 $588
$551
$500
$400
$300
$200
$100
$0
2018 2019 2020 2021 2022
+$34.9 MM
OR +5.9%
Net Interest
Income
Non-Interest over the
�
Income
previous year
Core revenue excludes gain
on sale of securities, fair value
adjustments and the gain on sale
of branches.
Select Financial Highlights
Maintaining a disciplined approach to reinforcing a fortress balance sheet,
cultivating our moderate risk profile and focusing on long-term client relationships
remain keys to our success. The company’s exceptional 2022 performance further
demonstrates our capability to thrive in all economic cycles and change events.
Our financial highlights included:
• Core revenue increased 6% to $623.1 million, compared to $588.2 million the
prior year.
• Net income was $195.4 million, just 3% off last year’s record.
• Core efficiency ratio improved to 57.99%, compared to 60.22% the prior year.
• Loans receivable increased 13% to a record $10.01 billion (excluding PPP loans).
• Core deposits rose to 95% of our total $13.6 billion in deposits.
• Non-performing assets remained exceptionally low at 0.15% of total assets.
We understand you count on us to deliver consistent, sustainable profitability to
generate reliable returns on your investment. We are pleased we were able to
provide steadily increasing dividends last year with cumulative cash dividends
declared to common shareholders of $1.76 per share, compared to $1.64 the prior
year. We also continued our stock repurchase program, buying back 200,000
shares of common stock.
Additional Accomplishments
Our continuing momentum was key to Forbes ranking us one of America’s 100
Best Banks for the sixth consecutive year and one of the World’s Best Banks
for the third year. Additionally, for the 10th year, we earned a five-star rating
from BauerFinancial, and J.D. Power again ranked us highest in the Northwest
region for customer satisfaction in their 2022 U.S. Retail Banking Satisfaction*
study. Independent recognition like this affirms our value proposition continues
to resonate with clients and reflects the caring, expert service our employees
provide every day.
We published our inaugural Environmental, Social and Governance (ESG)
Highlights Report last year. While we’ve been engaged in ESG related activities and
practices for a very long time, the report makes it easier to share more examples
and greater detail in a single, dedicated document.
We are pleased with our 2022 results. We understand the pace of change in our
industry demands bold thinking and ever-evolving agility to remain relevant in the
markets we serve. Last year, we again demonstrated we are up to the challenge.
As we continue navigating all economic cycles, we remain committed to being
responsible stewards of your investment and keeping true to our values and
guiding principle to ‘do the right thing’ for all our shareholders, clients, employees
and communities.
Sincerely,
Mark Grescovich
President and Chief Executive Officer
Banner Corporation and Banner Bank
*Banner Bank received the highest score in the Northwest Region of the J.D. Power 2022
U.S. Retail Banking Satisfaction Study of customers’ satisfaction with their primary bank.
Visit jdpower.com/awards for more details.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE TRANSITION PERIOD FROM __________to__________
Commission File Number 0-26584
BANNER CORPORATION
(Exact name of registrant as specified in its charter)
Washington
(State or other jurisdiction of incorporation
or organization)
91-1691604
(I.R.S. Employer
Identification Number)
10 South First Avenue, Walla Walla, Washington 99362
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (509) 527-3636
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share
(Title of Each Class)
BANR
(Trading Symbol)
The NASDAQ Stock Market LLC
(Name of Each Exchange on Which Registered)
Securities registered pursuant to section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes X No __
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes __No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No ____
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files)
Yes X No ____
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company" and
emerging growth company in Rule 12b-2 of the Exchange Act:
Large accelerated filer X Accelerated filer ___ Non-accelerated filer ___ Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ____
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U. S. C 7262(b)) by the registered public
accounting firm that prepared or issued its audit report. Yes ☒ No ___
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ☐ No X
The aggregate market value of the voting common equity held by non-affiliates of the registrant based on the closing sales price of the
registrant’s common stock quoted on The NASDAQ Stock Market on June 30, 2022, was:
Common Stock – $1,902,548,020
(The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the Registrant
that such person is an affiliate of the Registrant.)
The number of shares outstanding of each of the classes of the registrant’s classes of common stock as of January 31, 2023:
Common Stock, $.01 par value – 34,194,105 shares
Documents Incorporated by Reference
Portions of Proxy Statement for Annual Meeting of Shareholders to be held May 24, 2023 are incorporated by reference into Part III.
2
Page
Table of Contents
BANNER CORPORATION AND SUBSIDIARIES
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recent Developments and significant events
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lending Activities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset Quality
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Activities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposit Activities and Other Sources of Funds
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . .
Personnel
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxation .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Competition
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulation .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management Personnel
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Information
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
PART II
[Reserved]
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . .
Item 6.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Overview
Comparison of Financial Condition at December 31, 2022 and 2021 .
Comparison of Results of Operations
Years ended December 31, 2022 and 2021
Years ended December 31, 2021 and 2020
Market Risk and Asset/Liability Management .
Liquidity and Capital Resources
Capital Requirements
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.
. . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Principal Accounting Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Signatures
3
5
5
6
6
10
10
11
12
14
15
15
21
24
25
37
37
38
38
39
41
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46
58
65
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76
Forward-Looking Statements
Certain matters in this Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and
statements about future economic performance and projections of financial items, including statements about our financial condition, liquidity
and results of operations. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally
identified by use of the words “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,”
“probably,” “projects,” “outlook” or similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would” and “could.”
These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause our actual results
to differ materially from the results anticipated or implied by our forward-looking statements, including, but not limited to: potential adverse
impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the
Company’s business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the
effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including
Russia’s invasion of Ukraine, as well as increasing prices and supply chain disruptions, and any governmental or societal responses to the
COVID-19 pandemic, including new COVID-19 variants: the credit risks of lending activities, including changes in the level and trend of
loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses and provisions for credit losses;
the ability to manage loan delinquency rates; competitive pressures among financial services companies; changes in consumer spending or
borrowing and spending habits; interest rate movements generally and the relative differences between short and long-term interest rates, loan
and deposit interest rates, net interest margin and funding sources; the transition away from the London Interbank Offered Rate (LIBOR)
toward new interest rate benchmarks; the impact of repricing and competitors’ pricing initiatives on loan and deposit products; fluctuations in
the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values; the ability to adapt
successfully to technological changes to meet clients’ needs and developments in the marketplace; the ability to access cost-effective funding;
the ability to control operating costs and expenses, including the costs associated with our “Banner Forward” initiative; the use of estimates in
determining fair value of certain assets and liabilities, which estimates may prove to be incorrect and result in significant changes in
valuation; staffing fluctuations in response to product demand or the implementation of corporate strategies that affect employees, and
potential associated charges; disruptions, security breaches or other adverse events, failures or interruptions in, or attacks on, information
technology systems or on the third-party vendors who perform critical processing functions; changes in financial markets; changes in
economic conditions in general and in Washington, Idaho, Oregon and California in particular, including the risk of inflation; secondary
market conditions for loans and the ability to sell loans in the secondary market; the costs, effects and outcomes of litigation; legislation or
regulatory changes, including but not limited to changes in regulatory policies and principles, or the interpretation of regulatory capital or
other rules, results of safety and soundness and compliance examinations by the Board of Governors of the Federal Reserve System (the
Federal Reserve), the Federal Deposit Insurance Corporation (the FDIC), the Washington State Department of Financial Institutions, Division
of Banks (the Washington DFI), or other regulatory authorities, including the possibility that any such regulatory authority may, among other
things, require restitution or institute an informal or formal enforcement action which could require an increase in reserves for loan losses,
write-downs of assets or changes in regulatory capital position, or affect the ability to borrow funds, or maintain or increase deposits, or
impose additional requirements and restrictions, any of which could adversely affect liquidity and earnings; the availability of resources to
address changes in laws, rules, or regulations or to respond to regulatory actions; the quality and composition of our securities portfolio and
the impact of adverse changes in the securities markets; the inability of key third-party providers to perform their obligations; changes in
accounting principles, policies or guidelines, including additional guidance and interpretation on accounting issues and details of the
implementation of new accounting methods; the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and
other public health crises, acts of war or terrorism, and other external events on our business; other economic, competitive, governmental,
regulatory and technological factors affecting operations, pricing, products and services; future acquisitions by Banner of other depository
institutions or lines of business; and future goodwill impairment due to changes in Banner’s business, changes in market conditions; and other
risks detailed from time to time in our filings with the U.S. Securities and Exchange Commission (SEC), including this report on Form 10-K.
Any forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. We do not undertake and
specifically disclaim any obligation to update any forward-looking statements included in this report or the reasons why actual results could
differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking statements discussed in this report might not occur, and you should not put undue reliance
on any forward-looking statements.
As used throughout this report, the terms “we,” “our,” “us,” or the “Company” refer to Banner Corporation and its consolidated subsidiaries,
unless the context otherwise requires. All references to “Banner” refer to Banner Corporation and those to the “Bank” refer to its wholly-
owned subsidiary, Banner Bank.
4
Item 1 – Business
PART 1
General
Banner is a bank holding company incorporated in the State of Washington which wholly owns one subsidiary bank, Banner Bank. The Bank
is a Washington-chartered commercial bank that conducts business from its main office in Walla Walla, Washington and, as of December 31,
2022, its 137 branch offices and 18 loan production offices located in Washington, Oregon, California, Idaho and Utah. Banner is subject to
regulation by the Federal Reserve. The Bank is subject to regulation by the Washington DFI and the FDIC. As of December 31, 2022, we
had total consolidated assets of $15.83 billion, net loans of $10.01 billion, total deposits of $13.62 billion and total shareholders’ equity of
$1.46 billion. Banner’s common stock is traded on the NASDAQ Global Select Market under the ticker symbol “BANR.”
The Bank is a regional bank which offers a wide variety of commercial banking services and financial products to individuals, businesses and
public sector entities in its primary market areas. The Bank’s primary business is that of traditional banking institutions, accepting deposits
and originating loans in locations surrounding our offices in Washington, Oregon, California and Idaho. The Bank is also an active
participant in secondary loan markets, engaging in mortgage banking operations largely through the origination and sale of one- to four-
family and multifamily residential loans. Lending activities include commercial business and commercial real estate loans, agriculture
business loans, construction and land development loans, one- to four-family and multifamily residential loans, U.S. Small Business
Administration (SBA) loans and consumer loans.
We continue to invest in our delivery platform across the franchise with a primary emphasis on strengthening our presence in the higher
growth regions of our markets. In addition, we continue to improve the efficiency of our branch delivery channel with on-going branch
consolidations and investments in streamlining the origination of new loan and deposit accounts while simultaneously enhancing our digital
service and account origination capabilities. During the past few years, client adoption of mobile and digital banking has accelerated while
physical branch transaction volume has declined. Banner anticipates this shift in client service delivery channel preference will continue.
We also focus on expanding our product offerings and investing heavily in marketing campaigns designed to significantly increase the brand
awareness for the Bank. These marketing investments are a significant element in our strategy to grow client relationships and increase our
market presence, while allowing us to better serve existing and future clients. We believe our branch network, broad product line and
heightened brand awareness have created a franchise that is well positioned for growth and successful execution of our super community bank
model. Our overall strategy is focused on delivering clients, including middle market and small businesses, business owners, their families
and employees, a compelling value proposition by providing the financial sophistication and breadth of products of a regional bank while
retaining the appeal, responsiveness, and superior service level of a community bank.
In late 2021, we began implementing Banner Forward, a bank-wide initiative to enhance revenue growth and reduce operating expense.
Banner Forward is focused on accelerating growth in commercial banking, deepening relationships with retail clients, and advancing
technology strategies to enhance our digital service channels, while streamlining underwriting and back office processes. The implementation
of the revenue initiatives benefited the second half of 2022 and are expected to continue this trend in 2023. The efficiency-related initiatives
associated with Banner Forward have largely been completed.
Our successful execution of a super community bank model and strategic initiatives have delivered solid core operating results and
profitability over the last several years. Banner’s longer term strategic initiatives continue to focus on originating high quality assets and
client acquisition, which we believe will continue to generate strong revenue while maintaining the Company’s moderate risk profile. Our
total revenues (net interest income plus non-interest income) for 2022 increased $35.1 million, or 6%, to $628.4 million, compared to $593.3
million for 2021.
Our operating results depend primarily on our net interest income, which is the difference between interest income on interest-earning assets,
consisting primarily of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of client
deposits, Federal Home Loan Bank of Des Moines (FHLB) advances, other borrowings, subordinated notes, and junior subordinated
debentures. Net interest income is a function of our interest rate spread, which is the difference between the yield earned on interest-earning
assets and the average rate paid on interest-bearing liabilities, as well as a function of the average balances of interest-earning assets, interest-
bearing liabilities and non-interest-bearing funding sources including non-interest-bearing deposits.
Our net income is also affected by the level of our non-interest income, including deposit fees and other service charges, results of mortgage
banking operations, which includes gains and losses on the sale of loans and servicing fees, gains and losses on the sale of securities, as well
as our non-interest expenses and provisions for credit losses and income taxes. In addition, our net income is affected by the net change in the
value of certain financial instruments carried at fair value.
5
Sale of four branches
Recent Developments and Significant Events
On June 24, 2022, the Bank completed the sale of four branches located in Hayden, Idaho, and in Chewelah, Colville, and Kettle Falls,
Washington, generating a gain of $7.8 million. The branch sale included deposit accounts with an approximate balance of $178.2 million.
The Bank received a 5.0% premium in relation to the core deposits. The sale also included all related branch premises and equipment.
Consistent with the Banner Forward initiative of improving management’s focus on key operations and markets, the sale of these branches
improves the Bank’s service footprint, contributes to our capital and improves operating efficiency. The combined impact of these branch
sales and Banner Forward initiatives is expected to enhance future annual operating earnings.
Lending Activities
General: All of our lending activities are conducted through the Bank and its subsidiary, Community Financial Corporation, a residential
construction lender located in Portland, Oregon. We offer a wide range of loan products to meet the demands of our clients and our loan
portfolio is very diversified by product type, borrower and geographic location within our market area. We originate loans for our portfolio
and for sale in the secondary market. Management’s strategy has been to maintain a well-diversified portfolio with a significant percentage of
assets in the loan portfolio having more frequent interest rate repricing terms or shorter maturities than traditional long-term fixed-rate
mortgage loans. As part of this effort, we offer a variety of floating or adjustable interest rate products that correlate more closely with our
cost of interest-bearing funds, particularly loans for commercial business and real estate, agricultural business, and construction and
development purposes. In response to client demand, we also originate fixed-rate loans, including fixed interest rate mortgage loans with
terms of up to 30 years. The relative amount of fixed-rate loans and adjustable-rate loans that can be originated at any time is largely
determined by the demand for each in a competitive environment. At December 31, 2022, our net loan portfolio totaled $10.01 billion
compared to $8.95 billion at December 31, 2021.
Our lending activities are primarily directed toward the origination of real estate and commercial loans. Commercial real estate loans include
owner-occupied, investment properties and multifamily residential real estate. Our level of activity and investment in commercial real estate
loans was relatively stable prior to 2020, when COVID-19 caused a temporary slowdown followed by recovery in 2021 and 2022. We also
originate construction, land and land development loans, a significant component of which is our residential one- to four-family construction
loans. Our origination of construction, land and development loans has been significant during recent years and balances in this portion of the
portfolio have increased in recent periods but not at the same pace of originations as brisk sales of new homes have produced rapid turnover
through repayments. Our commercial business lending is directed toward meeting the credit and related deposit and treasury management
needs of various small- to medium-sized business and agribusiness borrowers operating in our primary market areas. To a lesser extent, our
commercial business lending has also included participation in certain national syndicated loans. The demand for commercial business loans
strengthened in 2021 and even further in 2022 as our production levels for 2022 exceeded 2021. Our residential mortgage loan originations
have been very strong in recent years, as sustained periods of low interest rates have supported demand for loans to refinance existing debt as
well as loans to finance home purchases. Demand for residential mortgage loans slowed during 2022 as the rise in interest rates reduced
refinance originations. Typically, most of the one- to four-family loans that we originate are sold in the secondary markets with net gains on
sales and loan servicing fees reflected in our revenues from mortgage banking. During 2022, due to the rising interest rates, a larger
percentage of our one- to four-family production was held for investment. Our consumer loan activity is primarily directed at meeting
demand from our existing deposit clients.
One- to Four-Family Residential Real Estate Lending: We originate loans secured by first mortgages on one- to four-family residences in the
markets we serve. Through our mortgage banking activities, we sell residential loans on either a servicing-retained or servicing-released
basis. In recent years, we have generally sold a significant portion of our conventional residential mortgage originations and nearly all of our
government insured loans in the secondary market. At December 31, 2022, $1.17 billion, or 12% of our loan portfolio, consisted of
permanent loans on one- to four-family residences.
We offer fixed- and adjustable-rate mortgages (ARMs) at rates and terms competitive with market conditions, primarily with the intent of
selling these loans into the secondary market. Fixed-rate loans generally are offered on a fully amortizing basis for terms ranging from ten to
30 years at interest rates and fees that reflect current secondary market pricing. Most ARM products offered by us adjust annually after an
initial period ranging from one to five years, subject to a limitation on the annual adjustment and a lifetime rate cap. For a small portion of
the portfolio, where the initial period exceeds one year, the first interest rate change may exceed the annual limitation on subsequent
adjustments. Our ARM products most frequently adjust based upon the average yield on Treasury securities adjusted to a constant maturity
of one year or other indices plus a margin or spread above the index. ARM loans held in our portfolio may allow for interest-only payments
for an initial period up to five years but do not provide for negative amortization of principal and carry no prepayment restrictions. The
retention of ARM loans in our loan portfolio can help reduce our exposure to changes in interest rates.
6
Our residential loans are generally underwritten and documented in accordance with the guidelines established by the Federal Home Loan
Mortgage Corporation (Freddie Mac or FHLMC) and the Federal National Mortgage Association (Fannie Mae or FNMA). Government
insured loans are underwritten and documented in accordance with the guidelines established by the Department of Housing and Urban
Development and the Department of Veterans Affairs. In the loan approval process, we assess the borrower’s ability to repay the loan, the
adequacy of the proposed security, the employment stability of the borrower and the creditworthiness of the borrower. For ARM loans, our
standard practice provides for underwriting based upon fully indexed interest rates and payments. Generally, we will lend up to 95% of the
lesser of the appraised value or purchase price of the property on conventional loans, although higher loan-to-value ratios are available on
secondary market programs. We require private mortgage insurance on conventional residential loans with a loan-to-value ratio at origination
exceeding 80%.
Construction and Land Lending: Historically, we have invested a significant portion of our loan portfolio in residential construction and land
loans to professional home builders and developers. Our land loans are typically on improved or entitled land, versus raw land. On a more
limited basis, we also make land loans to developers, builders and individuals to finance the acquisition and/or development of improved lots
or unimproved land. In making land loans, we follow more conservative underwriting policies than those for construction loans but maintain
similar disbursement and monitoring procedures. The initial term on land loans is typically one to three years with interest only payments,
payable monthly, with provisions for principal reduction as lots are sold and released.
We also make construction loans to qualified owner occupants, which upon completion of the construction phase convert to long-term
amortizing one- to four-family residential loans that are eligible for sale in the secondary market. We regularly monitor our construction and
land loan portfolios and the economic conditions and housing inventory in each of our markets and increase or decrease this type of lending as
we observe market conditions change. Our residential construction and land and land development lending has been recently increasing in
select markets and has made a meaningful contribution to our net interest income and profitability. To a lesser extent, we also originate
construction loans for commercial and multifamily real estate.
Although well diversified with respect to sub-markets, price ranges and borrowers, our construction, land and land development loans are
significantly concentrated in the greater Puget Sound region of Washington State and the Portland, Oregon market area. At December 31,
2022, our construction, land and land development loans totaled $1.49 billion, or 15% of total loans; 44% of the balance was comprised of
one- to four-family construction and residential land and land development loans, with the remaining balance comprised of commercial and
multifamily real estate construction loans and commercial land and land development loans.
Construction and land lending affords us the opportunity to achieve higher interest rates and fees with shorter terms to maturity than are
usually available on other types of lending. Construction and land lending, however, involves a higher degree of risk than other lending
opportunities. We attempt to address these risks by adhering to strict underwriting policies, disbursement procedures and monitoring
practices.
Commercial and Multifamily Real Estate Lending: We originate loans secured by multifamily and commercial real estate, including loans for
construction of multifamily and commercial real estate projects. Commercial real estate loans are made for both owner-occupied and
investor-owned properties. At December 31, 2022, our loan portfolio included $1.59 billion in non-owner-occupied commercial real estate
loans, $845.3 million in owner-occupied commercial real estate loans, $1.20 billion of small balance commercial real estate or CRE loans
(CRE loans up to $2 million) and $645.1 million in multifamily loans which in aggregate comprised 42% of our total loans. Multifamily and
commercial real estate lending affords us an opportunity to receive interest at rates higher than those generally available from one- to four-
family residential lending. In originating multifamily and commercial real estate loans, we consider the location, marketability and overall
attractiveness of the properties. Our underwriting guidelines for multifamily and commercial real estate loans require an appraisal from a
qualified independent appraiser, as well as an environmental risk assessment and an economic analysis of each property with regard to the
annual revenue and expenses, debt service coverage and fair value to determine the maximum loan amount. In the approval process we assess
the borrower’s willingness and ability to manage the property and repay the loan and the adequacy of the collateral in relation to the loan
amount. While a portion of our multifamily loan originations are held for investment, typically the majority of multifamily loan originations
are sold with the gain recognized as mortgage banking income.
Multifamily and commercial real estate loans originated by us are both fixed- and adjustable-rate loans with intermediate terms of generally
five to ten years. A significant portion of our multifamily and commercial real estate loans are linked to various FHLB advance rates, certain
prime rates, US Treasury rates, or other market rate indices. Rates on these adjustable-rate loans generally adjust with a frequency of one to
five years after an initial fixed-rate period ranging from one to ten years. Our commercial real estate portfolio consists of loans on a variety of
property types with no large concentrations by property type, location or borrower. At December 31, 2022, the average size of our
commercial real estate loans was $1.0 million and the largest commercial real estate loan, in terms of an outstanding balance, in our portfolio
was $19.7 million.
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Commercial Business Lending: We are active in small- to medium-sized business lending. Our commercial bankers are focused on local
markets and devote a great deal of effort to developing client relationships and providing these types of borrowers with a full array of
products and services delivered in a thorough and responsive manner. Our experienced commercial bankers and senior credit staff help us
meet our commitment to small business lending while also focusing on corporate lending opportunities for borrowers with credit needs
generally in a $3 million to $25 million range. In addition to providing earning assets, commercial business lending has helped us increase
our deposit base. In recent years, our commercial business lending has included modest participation in certain national syndicated loans,
including shared national credits. We also originate smaller balance business loans principally through our retail branch network, using our
Quick Step business loan program, which is closely aligned with our consumer lending operations and relies on centralized underwriting
procedures. Quick Step business loans are available up to $1.0 million, business lines of credit are available up to $500,000 and real estate
loans are available up to $1.0 million.
As a result of the COVID-19 pandemic, the CARES Act was enacted and authorized the SBA to temporarily guarantee loans under a new
loan program called the Paycheck Protection Program (PPP). As a qualified SBA lender, beginning in the second quarter of 2020, we began
to offer SBA PPP loans to existing and new clients. The SBA guarantees 100% of the SBA PPP loans made to eligible borrowers. The entire
principal amount of the borrower’s SBA PPP loan, including any accrued interest, is eligible to be forgiven and repaid by the SBA if the
borrower meets the SBA PPP conditions. The great majority of our SBA PPP loans have been forgiven by the SBA in accordance with the
terms of the program. We earn 1% interest on SBA PPP loans as well as a fee from the SBA to cover processing costs, which is amortized
over the life of the loan and recognized fully at payoff or forgiveness. The maturity date of the SBA PPP loan is either two or five years from
the date of loan origination. At December 31, 2022 and 2021, our total SBA PPP loan balance was $7.9 million and $133.90 million,
respectively. The balance of unamortized net deferred fees on SBA PPP loans was $261,000 at December 31, 2022, compared to $4.5 million
at December 31, 2021. The PPP ended on May 31, 2021.
Commercial business loans, other than SBA PPP loans, may entail greater risk than other types of loans. Conventional commercial business
loans generally provide higher yields or related revenue opportunities than many other types of loans but also require more administrative and
management attention. Loan terms, including the fixed or adjustable interest rate, the loan maturity and the collateral considerations, vary
significantly and are negotiated on an individual loan basis.
We underwrite our conventional commercial business loans on the basis of the borrower’s cash flow and ability to service the debt from
earnings rather than on the basis of the underlying collateral value. We seek to structure these loans so that they have more than one source of
repayment. The borrower is required to provide us with sufficient information to allow us to make a prudent lending determination. In most
instances, this information consists of at least three years of financial statements and tax returns, a statement of projected cash flows, current
financial information on any guarantor and information about the collateral. Loans to closely held businesses typically require personal
guarantees by the principals. Our commercial business loan portfolio is geographically dispersed across the market areas serviced by our
branch network and there are no significant concentrations by industry or product.
Our commercial business loans may be structured as term loans or as lines of credit. Commercial business term loans are generally made to
finance the purchase of fixed assets and have maturities of five years or less. Commercial business lines of credit are typically made for the
purpose of providing working capital and are usually approved with a term of one year. Adjustable- or floating-rate loans are primarily tied to
prime and Secured Overnight Financing Rate (SOFR) indices. At December 31, 2022, commercial business loans totaled $1.28 billion, or
13% of our total loans receivable, including $7.6 million of SBA PPP loans and $234.1 million of shared national credits.
Agricultural Lending: Agriculture is a major industry in several of our markets. We make agricultural loans to borrowers with a strong
capital base, sufficient management depth, proven ability to operate through agricultural cycles, reliable cash flows and adequate financial
reporting. Payments on agricultural loans depend, to a large degree, on the results of operations of the related farm entity. The repayment is
also subject to other economic and weather conditions as well as market prices for agricultural products, which can be highly volatile. At
December 31, 2022, agricultural business loans, including collateral secured loans to purchase farm land and equipment, totaled $295.1
million, or 3% of our loan portfolio.
Agricultural operating loans generally are made as a percentage of the borrower’s anticipated income to support budgeted operating
expenses. These loans are secured by a blanket lien on all crops, livestock, equipment, accounts and products and proceeds thereof. In the
case of crops, consideration is given to projected yields and prices from each commodity. The interest rate is normally floating based on the
prime rate or another index plus a negotiated margin. Because these loans are made to finance a farm’s or ranch’s annual operations, they are
usually written on a one-year review and renewable basis. The renewal is dependent upon the prior year’s performance and the forthcoming
year’s projections as well as the overall financial strength of the borrower. We carefully monitor these loans and related variance reports on
income and expenses compared to budget estimates. To meet the seasonal operating needs of a farm, borrowers may qualify for single
payment notes, revolving lines of credit and/or non-revolving lines of credit.
In underwriting agricultural operating loans, we consider the cash flow of the borrower based upon the expected operating results as well as
the value of collateral used to secure the loans. Collateral generally consists of cash crops produced by the farm, such as milk, grains, fruit,
grass seed, peas, sugar beets, mint, onions, potatoes, corn and alfalfa or livestock. In addition to considering cash flow and obtaining a
blanket security interest in the farm’s cash crop, we may also collateralize an operating loan with the farm’s operating equipment, breeding
stock, real estate and federal agricultural program payments to the borrower.
8
We also originate loans to finance the purchase of farm equipment. Loans to purchase farm equipment are made for terms of up to seven
years. On occasion, we also originate agricultural real estate loans secured primarily by first liens on farmland and improvements thereon
located in our market areas, although generally only to service the needs of our existing clients. Loans are generally written in amounts
ranging from 50% to 75% of the tax assessed or appraised value of the property for terms of five to 20 years. These loans typically have
interest rates that adjust at least every five years based upon a Treasury index or FHLB advance rate plus a negotiated margin. Fixed-rate
loans are granted on terms usually not to exceed five years. In originating agricultural real estate loans, we consider the debt service coverage
of the borrower’s cash flow, the appraised value of the underlying property, the experience and knowledge of the borrower, and the
borrower’s past performance with us and/or the market area. These loans normally are not made to start-up businesses and are reserved for
existing clients with substantial equity and a proven history.
Among the more common risks to agricultural lending can be weather conditions and disease. These risks may be mitigated through multi-
peril crop insurance. Commodity prices also present a risk, which may be mitigated through by the use of set price contracts. Normally,
required beginning and projected operating margins provide for reasonable reserves to offset unexpected yield and price deficiencies. In
addition to these risks, we also consider management succession, life insurance and business continuation plans when evaluating agricultural
loans.
Consumer and Other Lending: We originate a variety of consumer loans, including home equity lines of credit, automobile, boat and
recreational vehicle loans and loans secured by deposit accounts. While consumer lending has traditionally been a small part of our business,
with loans made primarily to accommodate our existing client base, it has received consistent emphasis in recent years. Part of this emphasis
includes a Banner Bank-owned credit card program. Similar to other consumer loan programs, we focus this credit card program on our
existing client base to add to the depth of our client relationships. In addition to earning balances, credit card accounts produce non-interest
revenues through interchange fees and other activity-based revenues. Our underwriting of consumer loans is focused on the borrower’s credit
history and ability to repay the debt as evidenced by documented sources of income. At December 31, 2022, we had $680.9 million, or 7% of
our loan portfolio, in consumer related loans, including $566.3 million, or 6% of our loan portfolio, in consumer loans secured by one- to
four-family residences.
Loan Solicitation and Processing: We originate real estate loans in our market areas by direct solicitation of builders, developers, depositors,
walk-in clients, real estate brokers and visitors to our website. One- to four-family residential loan applications are taken by our mortgage
loan officers or through our website and are processed in branch or regional locations. In addition, we have specialized loan origination units,
focused on construction and land development, commercial real estate and multifamily loans. Most underwriting and loan administration
functions for our real estate loans are performed by loan personnel at central locations.
In addition to commercial real estate loans, our commercial bankers solicit commercial and agricultural business loans through call programs
focused on local businesses and farmers. While commercial bankers are delegated reasonable lending authority based upon their
qualifications, credit decisions on significant commercial and agricultural loans are made by senior credit officers based on their lending
authority or if required, by the Credit Risk Committee of the Board of Directors of the Bank.
We originate consumer loans and small business (including Quick Step) commercial business loans through various marketing efforts directed
primarily toward our existing deposit and loan clients. Consumer and small business commercial business loan applications are primarily
underwritten and documented by centralized administrative personnel.
Loan Originations, Sales and Purchases
While we originate a variety of loans, our ability to originate each type of loan is dependent upon the relative client demand and competition
in each market we serve. For the years ended December 31, 2022 and 2021, we originated loans, net of repayments, including our
participation in syndicated loans and loans held for sale of $1.30 billion and $306.8 million, respectively. The year ended December 31, 2022
included repayments of SBA PPP loans of $126.0 million, compared to repayments net of originations of SBA PPP loans of $910.5 million
for the year ended December 31, 2021.
We sell many of our newly originated one- to four-family residential mortgage loans and multifamily loans to secondary market purchasers as
part of our interest rate risk management strategy. Originations of loans for sale decreased to $406.9 million for the year ended December 31,
2022 from $1.10 billion during 2021. Originations of loans for sale included $122.2 million and $225.0 million of multifamily held for sale
loan production for the years ended December 31, 2022 and December 31, 2021, respectively. Sales of loans generally are beneficial to us
because these sales may generate income at the time of sale, provide funds for additional lending and other investments, increase liquidity or
reduce interest rate risk. During the year ended December 31, 2022, we received proceeds of $415.6 million from the sale of loans held for
sale compared to $1.28 billion for the year ended December 31, 2021. The held for sale loans sold in 2022 and 2021 included $26.3 million
and $287.7 million, respectively, of multifamily loans held for sale. We sell one- to four-family mortgage loans on both a servicing-retained
and a servicing-released basis. All loans are sold without recourse but subject to the standard representations and warranties contained in the
loan sale agreement. The decision to hold or sell loans is based on asset liability management goals, strategies and policies and on market
conditions. In addition, we generally sell the guaranteed portion of SBA loans.
We periodically purchase whole loans and loan participation interests or participate in syndicates, including shared national credits. These
purchases are made during periods of reduced loan demand in our primary market area as well as to support our Community Reinvestment
Act lending activities. Any such purchases or loan participations are generally made on terms consistent with our underwriting standards;
however, the loans may be located outside of our normal lending area.
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Loan Servicing
We receive fees from a variety of institutional owners in return for performing the traditional services of collecting individual payments and
managing portfolios of sold loans. At December 31, 2022, we were servicing $3.01 billion of loans for others. Loan servicing includes
processing payments, accounting for loan funds and collecting and paying real estate taxes, hazard insurance and other loan-related items such
as private mortgage insurance. In addition to earning fee income, we retain certain amounts in escrow for the benefit of the lender for which
we incur no interest expense but are able to invest the funds into earning assets.
Mortgage and SBA Servicing Rights: We record mortgage servicing rights (MSRs) with respect to loans we originate and sell in the
secondary market on a servicing-retained basis and SBA servicing rights with respect to the guaranteed portion of SBA loans we sell. The
value of MSRs is capitalized and amortized in proportion to, and over the period of, the estimated future net servicing income. Management
periodically evaluates the estimates and assumptions used to determine the carrying values of MSRs and the amortization of MSRs. MSRs
generally are adversely affected by higher levels of current or anticipated prepayments resulting from decreasing interest rates. MSRs are
evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is recognized through a valuation
allowance, to the extent that fair value is less than the capitalized carrying amount. SBA servicing rights are initially recorded and carried at
fair value. Any change in the fair value of SBA servicing rights is recorded in non-interest income. At December 31, 2022, our MSRs were
carried at a value of $15.3 million, net of amortization, and SBA servicing rights were carried at a value of $835,000.
Asset Quality
Classified Assets: State and federal regulations require that the Bank reviews and classify its problem assets on a regular basis. In addition,
in connection with examinations of insured institutions, state and federal examiners have authority to identify problem assets and, if
appropriate, require them to be classified. Historically, we have not had any meaningful differences of opinion with the examiners with
respect to asset classification. The Bank’s Credit Policy Division reviews detailed information with respect to the composition and
performance of the loan portfolios, including information on risk concentrations, delinquencies and classified assets for the Bank. The Credit
Policy Division approves all recommendations for new classified loans or, in the case of smaller-balance homogeneous loans including
residential real estate and consumer loans, it has approved policies governing such classifications, or changes in classifications, and develops
and monitors action plans to resolve the problems associated with the assets. The Credit Policy Division also approves recommendations for
establishing the appropriate level of the allowance for credit losses. Significant problem loans are transferred to the Bank’s Special Assets
Department for resolution or collection activities. Both the Bank’s and Banner’s Boards of Directors, or their respective committees, review
asset quality at least quarterly.
Allowance for Credit Losses: In originating loans, we recognize that losses will be experienced and that the risk of loss will vary with, among
other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in
the case of a secured loan, the quality of the security for the loan. The allowance for credit losses is maintained at a level sufficient to provide
for expected credit losses over the life of the loan based on evaluating specific risk characteristics in the current loan portfolio and forecasted
economic conditions, as well as historical credit loss experience. We increase our allowance for credit losses by charging a provision for
credit losses against income.
Real Estate Owned: Real estate owned (REO) is property acquired by foreclosure or receiving a deed in lieu of foreclosure, and is recorded at
the estimated fair value of the property, less expected selling costs. Development and improvement costs relating to the property are
capitalized to the extent they add value to the property. The carrying value of the property is periodically evaluated by management and, if
necessary, allowances are established to reduce the carrying value to net realizable value. Gains or losses at the time the property is sold are
credited or charged to operations in the period in which they are realized. The amounts we will ultimately recover from REO may differ
substantially from the carrying value of the assets because of market factors beyond our control or because of changes in our strategies for
recovering the investment.
Investment Activities
Investment Securities: Under Washington state law and FDIC regulation, banks are permitted to invest in various types of marketable
securities. Authorized securities include but are not limited to Treasury obligations, securities of various federal agencies (including
government-sponsored enterprises), mortgage-backed and asset-backed securities, certain certificates of deposit of insured banks and savings
institutions, bankers’ acceptances, repurchase agreements, federal funds, commercial paper, corporate debt and equity securities and
obligations of states and their political subdivisions. Our investment policies are designed to provide and maintain adequate liquidity and to
generate favorable rates of return without incurring undue interest rate or credit risk. Our policies generally limit investments to U.S.
Government and agency (including government-sponsored entities) securities, municipal bonds, certificates of deposit, corporate debt
obligations and mortgage-backed securities. Investment in mortgage-backed securities may include those issued or guaranteed by Freddie
Mac, Fannie Mae, Government National Mortgage Association (Ginnie Mae or GNMA) and investment grade privately-issued mortgage-
backed securities, as well as collateralized mortgage obligations (CMOs). All of our investment securities, including those with a credit
rating, are subject to market risk in so far as a change in market rates of interest or other conditions may cause a change in an investment’s
earnings performance and/or market value.
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Derivatives: The Company, through its Banner Bank subsidiary, is party to various derivative instruments that are used for asset and liability
management and client financing needs. Derivative instruments are contracts between two or more parties that have a notional amount and an
underlying variable, require no net investment and allow for the net settlement of positions. The notional amount serves as the basis for the
payment provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents a specified
interest rate, index, or other component. The interaction between the notional amount and the underlying variable determines the number of
units to be exchanged between the parties and influences the market value of the derivative contract.
Our predominant derivative and hedging activities involve interest rate swaps related to certain term loans, interest rate lock commitments to
borrowers, and forward sales contracts associated with mortgage banking activities. Generally, these instruments help us manage exposure to
market risk and meet client financing needs. Market risk represents the possibility that economic value or net interest income will be
adversely affected by fluctuations in external factors such as market-driven interest rates and prices or other economic factors.
Deposit Activities and Other Sources of Funds
General: Deposits, FHLB advances (or other borrowings) and loan repayments are our major sources of funds for lending and other
investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are influenced by general economic, interest rate and money market conditions and may vary significantly. Borrowings may be
used on a short-term basis to compensate for reductions in the availability of funds from other sources. Borrowings may also be used on a
longer-term basis to fund loans and investments, as well as to manage interest rate risk.
We compete with other financial institutions and financial intermediaries in attracting deposits. There is strong competition for transaction
balances and savings deposits from commercial banks, credit unions and non-bank corporations, such as securities brokerage companies,
mutual funds and other diversified companies, some of which have nationwide networks of offices. Much of the focus of our acquisitions,
branch relocations and renovations, and advertising and marketing campaigns has been directed toward attracting additional deposit client
relationships and balances. In addition, our electronic and digital banking activities including debit card and automated teller machine (ATM)
programs, Internet banking services and client remote deposit and mobile banking capabilities are all directed at providing products and
services that enhance client relationships and result in growing deposit balances as well as fee income. Core deposits (non-interest-bearing
checking and interest-bearing transaction and savings accounts) are a fundamental element of our business strategy. Core deposits were 95%
of total deposits at December 31, 2022, compared to 94% a year earlier.
Deposit Accounts: We generally attract deposits from within our primary market areas by offering a broad selection of deposit instruments,
including non-interest-bearing checking accounts, interest-bearing checking accounts, money market deposit accounts, regular savings
accounts, certificates of deposit, treasury management services and retirement savings plans. Deposit account terms vary according to the
minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the
terms of deposit accounts, we consider current market interest rates, profitability to us, matching deposit and loan products and client
preferences and concerns.
Borrowings: While deposits are the primary source of funds for our lending and investment activities and for general business purposes, we
also use borrowings to supplement our supply of lendable funds, to meet deposit withdrawal requirements and to more efficiently leverage our
capital position. The FHLB serves as our primary borrowing source. The FHLB provides credit for member financial institutions such as the
Bank. As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the security of that
stock and certain of its mortgage loans and securities, provided that certain credit worthiness standards have been met. Limitations on the
amount of advances are based on the financial condition of the member institution, the adequacy of collateral pledged to secure the credit, and
FHLB stock ownership requirements. The Federal Reserve Bank serves as an additional source of borrowing capacity. The Federal Reserve
Bank provides credit based upon acceptable loan collateral, which includes certain loan types not eligible for pledging to the FHLB.
In addition, the Bank has federal funds line of credit agreements with other financial institutions. Availability of lines is subject to federal
funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs and the
agreements may restrict consecutive day usage.
We issue retail repurchase agreements, generally due within 90 days, as an additional source of funds, primarily in connection with treasury
management services provided to our larger deposit clients. We also may borrow funds through the use of secured wholesale repurchase
agreements with securities brokers.
We issued junior subordinated debentures in connection with the sale of trust preferred securities (TPS) from 2002 through 2007 by special
purpose business trusts formed by Banner and sold in private offerings to pooled investment vehicles. We invested substantially all of the
proceeds from the issuance of these TPS as additional paid in capital at the Bank. In addition, Banner has acquired through acquisitions
additional junior subordinated debentures. During 2020, we also issued and sold 5.0% fixed-to-floating subordinated notes due in 2030.
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Human Capital
Strategic Priority: Retain, develop and attract talented people.
Personnel
At Banner, we seek to provide a work environment that retains, develops and attracts top talent by offering our employees an engaging work
experience that allows for career growth and opportunities for meaningful community involvement. Our employees contribute to our
commitment to social responsibility through personal volunteerism and active engagement in the communities in which they live and work.
As our business grows and evolves, the demand for qualified candidates continues to grow. Meanwhile, the pool of experienced candidates
continues to tighten across the financial services industry, making it increasingly challenging to compete for top candidates. To address this
challenge, we have developed and continue to enhance a robust and comprehensive company-wide talent management program. The program
spans from talent acquisition and selection to performance coaching, career development and retention of our top talent and ultimately to
succession planning, always with a focus on diversity, equity and inclusion.
Diversity, Equity and Inclusion (DEI). Our commitment to diversity starts with our Board of Directors, which oversees our culture and
holds management accountable to build and maintain a diverse and inclusive environment. Our Board, through its Compensation and Human
Capital Committee and in partnership with the Bank’s executive team, including its Chief Human Resources and Diversity Officer, oversees
our human capital management strategies, programs and practices, including our diversity and inclusion initiatives; oversees our
establishment, maintenance and administration of appropriately designed compensation programs and plans; and reviews our employee
engagement and exit survey trends.
Our cross-functional, employee-led DEI council provides leadership and serves as a catalyst for inclusion and diversity initiatives across our
organization. The DEI council is intended to help develop effective strategies to encourage diversity, equity and inclusion in our workplace
as well as to attract, develop and retain diverse talent. Additionally, our CEO, Mark Grescovich, has signed the CEO Action for Diversity &
Inclusion Pledge to demonstrate our commitment to fostering a diverse and inclusive workplace. With this commitment, among other things,
we provide unconscious bias training to all of our employees to help them recognize their blind spots.
We aim to maintain a work environment where every employee is treated with dignity and respect, is free from discrimination and harassment
and is allowed to devote their full attention and best efforts to performing their job to the best of their ability; we maintain a Respectful
Workplace Policy in alignment with this commitment. Employing the best talent — including individuals who possess a broad range of
experiences, backgrounds and skills — enables us to anticipate and meet the needs of our business and our clients. We have a strong team of
colleagues who are collectively capable of professionally operating the business and fulfilling our vision. The following tables illustrate our
employees’ gender and racial diversity by level as of December 31, 2022:
Employee Position Level
Individual Contributor
Manager
Director*
Executive
Total workforce
* Refers to director-level employees, not Board of Directors
Employee Position Level
Individual Contributor
Manager
Director*
Executive
Total workforce
* Refers to director-level employees, not Board of Directors
Female
Male
70 %
65 %
46 %
38 %
68 %
Persons of Color
White
29 %
20 %
14 %
— %
27 %
30 %
35 %
54 %
62 %
32 %
71 %
80 %
86 %
100 %
73 %
Talent Acquisition and Attrition. The competition for qualified talent continues to increase and we have implemented a number of actions
to support recruitment and retention. To cultivate and recruit hard-to-fill positions, we partner closely with several colleges and universities
with well-known programs relevant to our business. In 2022, we formally launched a Flexible Workplace Program designed to support hiring
talent from a more diverse group of candidates, improve the work experience for our employees, enhance retention and strengthen our
leadership pipeline. Additionally, we remain highly focused on retention of female and diverse talent where competitive pressures continue to
escalate. Our voluntary turnover rate in 2022 decreased to 21% as compared to 23% in 2021.
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Our employment application and hiring processes do not solicit prior compensation information from candidates. This helps ensure our new
hire compensation is based on individual qualifications and roles, rather than how a candidate may have been previously compensated.
During 2022, we hired 571 employees. As of December 31, 2022, we had approximately 37% of our workforce working remotely with
women representing 67% and people of color representing 19% of our remote employees.
Employee Engagement. We utilize anonymous employee surveys to seek valuable feedback on key initiatives and leverage the results to
improve current programs as well as develop new programs. To drive employee engagement, we share the results with our employees.
Additionally, senior leadership analyzes areas of progress or opportunities for improvement and prioritizes responsive actions and activities.
We have in the past conducted a traditional employee engagement survey, but during the COVID-19 pandemic – particularly in the first year
of the pandemic – we shifted our approach to use “pulse surveys,” which enable more frequent engagement with employees and allowed us to
focus on discrete areas of employee well-being or other topics of particular interest. In 2022, we focused on employee well-being by adding a
pulse survey to address employee burnout.
Total Rewards (Compensation and Benefits). We provide robust compensation and benefits programs to help meet the needs of our
employees. These programs include, subject to eligibility policies, variable pay tied to performance for all employees, a 401(k) plan
(including an employer match up to 4% of eligible earnings), healthcare and insurance benefits, health savings and flexible spending
accounts, paid time off, family care resources, flexible work schedules, employee assistance programs and tuition assistance, among many
others. We also grant long-term, stock-based incentive awards to a select group of senior leaders who we believe will play critical roles in the
Company’s future.
Pay equity is a core tenet of our compensation philosophy and is central to our values. Banner began conducting periodic, rigorous pay equity
studies in 2017 with the assistance of outside experts to examine groups of employees in similar roles, accounting for factors that
appropriately explain differences in pay, such as job location and experience. We intend to continue our pay equity analysis on a periodic
basis to support our ongoing commitment in this area.
We offer comprehensive health insurance coverage, including telehealth services, to employees working an average of 20 hours or more each
week. Coverage is also available to eligible employees’ family members including domestic partners. In addition to our traditional health
insurance coverage, we offer employees a suite of mental health-related programs and benefits, including text-based and telehealth services, a
24-hour nurse line and an employee assistance program. Additionally, we offer virtual physical therapy benefits, virtual support for
hypertension and diabetes, and subsidized child, adult or senior care planning services.
At the beginning of 2022, we launched our parental leave program which provides eight weeks of leave for both birth and non-birth parents,
as well as adoption or surrogacy. In addition to traditional sick leave of up to ten days per year, in 2022 we added (i) 12 weeks of short-term
disability coverage, and (ii) a new paid company holiday – Juneteenth – a historically important day that aligns with our diversity and
inclusion efforts. We also offer up to 16 paid hours that employees can take during the year to celebrate an individual day of significance,
such as a religious holiday or a day of cultural significance, or for other personal reasons.
Health, Safety and Well-being. The success of our business is fundamentally connected to the well-being of our employees. We provide
employees and their families with access to a variety of programs to support their physical and mental health. In 2022, we were pleased to
add a wellness coach benefit (which can also be shared with up to five non-family members) that provides unlimited free one-on-one personal
coaching in several different categories such as fitness, nutrition, life coaching, and financial coaching, as well as a range of tools to improve
sleep quality.
Volunteerism. We strive to be a good corporate citizen by encouraging employees to be engaged in the communities where they live and
work. To help remove roadblocks to volunteering, we offer Community Connections, a program that offers employees up to 16 hours of paid
time off to volunteer at non-profit organizations of their choice. We also encourage employees to serve in leadership roles in these
organizations as part of their professional development. We are proud to support many local community organizations through financial
contributions and employee-driven volunteerism, including Junior Achievement, United Way and hundreds of other organizations.
Talent Development. We invest significant resources developing the talent needed to be an employer of choice. We deliver a variety of
training opportunities, and our talent development programs provide employees with resources to help achieve their career goals, build
management skills and lead their teams. To encourage advancement and growth within our organization, we provide information and guides
to help individuals design their own career paths. With this strong focus on internal talent development, we filled 20% of all open positions
with internal candidates in 2022. Internal mobility is a particular focus for our DEI council as part of our strategy to increase diverse
representation at more senior levels of the organization.
We require all employees to complete a wide range of online training courses on an annual basis, including job-specific courses as well as
general courses covering regulatory compliance, cybersecurity, fraud prevention, workplace standards and ethics, among others. We also
encourage employees to enroll in outside education programs to broaden their knowledge and enhance job performance. We provide tuition
assistance for external education to help employees hone existing skills and acquire new competencies in areas that align with business goals.
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Succession Planning. Because our Board of Directors recognizes the importance of succession planning for our CEO and other key
executives, the Board is actively involved in monitoring our efforts surrounding this initiative. The Board annually reviews our succession
plans for senior leadership roles, with the goal of ensuring we will continue to have the right leadership talent in place to execute the
organization’s long-term strategic plans. Through its Compensation and Human Capital Committee, our Board of Directors provides
oversight of our talent development and succession planning for senior leadership roles, including reviewing the metrics we track on the
gender and ethnic diversity of high-potential employees.
Human Capital Metrics. We capture critical metrics regarding human capital management and report them to the Compensation and
Human Capital Committee of the Board of Directors on a quarterly basis. The Human Capital Management Dashboard includes a mixture of
trending and point-in-time metrics designed to provide information and analysis of workforce demographics; talent acquisition; workforce
stability (retention, turnover, etc.); employee engagement; learning and development; and total rewards. As of December 31, 2022, we
employed 1,977 full- and part-time employees across our four-state footprint, which equates to 1,931 full-time equivalent employees (based
on scheduled hours). Our employees are not represented by a collective bargaining agreement. As of December 31, 2022, 59% of our
employees work in Washington State. We also have employees working in Oregon (19%), California (15%) and other states (7%). As of
December 31, 2022, five generations of employees were represented in our workplace with Millennials being our largest generation (37%),
followed by Gen Xers (35%), Boomers (20%) and Gen Zers (8%).
Incentive Compensation Risk Management. We strive to align incentives with the risk and performance frameworks of the Company. The
Company’s “pay for performance” philosophy connects individual, operating unit and Company results to compensation, providing
employees with opportunities to share in the Company’s overall growth and success. We develop, execute and govern all incentive
compensation plans to discourage imprudent or excessive risk-taking and balance financial reward in a manner that supports our clients,
employees and Company.
Tax-Sharing Agreement
Taxation
Banner files its federal and state income tax returns on a consolidated basis under a tax-sharing agreement between the Company and the
Bank, including the Bank’s subsidiaries. Each company of the consolidated group has calculated a minimum income tax which would be
required if the individual subsidiary were to file federal and state income tax returns as a separate entity. Each subsidiary pays to the
Company an amount equal to the estimated income tax due if it were to file as a separate entity. The payment is made on or about the time
the subsidiary would be required to make such tax payments to the United States Treasury or the applicable State Departments of Revenue.
In the event the computation of the subsidiary’s federal or state income tax liability, after taking into account any estimated tax payments
made, would result in a refund if the subsidiary were filing income tax returns as a separate entity, then the Company pays to the subsidiary an
amount equal to the hypothetical refund. The Company is an agent for each subsidiary with respect to all matters related to the consolidated
tax returns and refunds claims. If Banner’s consolidated federal or state income tax liability is adjusted for any period, the liability of each
party under the tax-sharing agreement is recomputed to give effect to such adjustments and any additional payments required as a result of the
adjustments are made within a reasonable time after the corresponding additional tax payments are made or refunds are received.
Federal Taxation
For tax reporting purposes, we report our income on a calendar year basis using the accrual method of accounting on a consolidated
basis. We are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the
reserve for bad debts.
State Taxation
Washington Taxation: We are subject to a Business and Occupation (B&O) tax which is imposed by the State of Washington on gross
receipts. Interest received on loans secured by mortgages or deeds of trust on residential properties, residential mortgage-backed securities,
and certain U.S. Government and agency securities is not subject to this tax.
California, Oregon, Idaho, Montana and Utah Taxation: Corporations with nexus in the states of California, Oregon, Idaho, Montana and
Utah are subject to a corporate level income tax. In 2020, the state of Oregon implemented a tax on Oregon corporate revenue. If a large
percentage of our income were to come from these states, our state income tax provision would have an increased effect on our effective tax
rate and results of operations.
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Competition
We encounter significant competition both in attracting deposits and in originating loans. Our most direct competition for deposits comes
from other commercial and savings banks, savings associations and credit unions with offices in our market areas. We also experience
competition from securities firms, insurance companies, money market and mutual funds, and other investment vehicles. We expect
continued strong competition from such financial institutions and investment vehicles in the foreseeable future, including competition from
on-line banking competitors and “FinTech” companies that rely on technology to provide financial services. Our ability to attract and retain
deposits depends on our ability to provide transaction services and investment opportunities that satisfy the requirements of depositors. We
compete for deposits by offering a variety of accounts and financial services, including electronic banking capabilities, with competitive rates
and terms, at convenient locations and business hours, and delivered with a high level of personal service and expertise.
Competition for loans comes principally from other commercial banks, loan brokers, mortgage banking companies, savings banks and credit
unions and for agricultural loans from the Farm Credit Administration. The competition for loans is intense as a result of the large number of
institutions competing in our market areas. We compete for loans primarily by offering competitive rates and fees and providing timely
decisions and excellent service to borrowers.
Regulation
General: As a state-chartered, federally insured commercial bank, the Bank is subject to extensive regulation and must comply with various
statutory and regulatory requirements, including prescribed minimum capital standards. The Bank is regularly examined by the FDIC and the
Washington DFI and files periodic reports concerning its activities and financial condition with these banking regulators. The Bank’s
relationship with depositors and borrowers also is regulated to a great extent by both federal and state law, especially in such matters as the
ownership of deposit accounts and the form and content of mortgage and other loan documents.
Federal and state banking laws and regulations govern all areas of the operation of the Bank, including reserves, loans, investments, deposits,
capital, issuance of securities, payment of dividends and establishment of branches. Federal and state bank regulatory agencies also have the
general authority to limit the dividends paid by insured banks and bank holding companies if such payments should be deemed to constitute
an unsafe and unsound practice and in other circumstances. The Federal Reserve and FDIC, as the respective primary federal regulators of
Banner and of the Bank, have authority to impose penalties, initiate civil and administrative actions and take other steps intended to prevent
banks from engaging in unsafe or unsound practices. The Consumer Financial Protection Bureau (CFPB) is an independent bureau within the
Federal Reserve System. The CFPB is responsible for the implementation of the federal financial consumer protection and fair lending laws
and regulations and has authority to impose new requirements.
Any change in applicable laws, regulations, or regulatory policies may have a material effect on our business, operations, and prospects. We
cannot predict the nature or the extent of the effects on our business and earnings that any fiscal or monetary policies or new federal or state
legislation may have in the future.
The following is a summary discussion of certain laws and regulations applicable to Banner and the Bank which is qualified in its entirety by
reference to the actual laws and regulations.
Banner Bank
State Regulation and Supervision: As a Washington state-chartered commercial bank with branches in the States of Washington, Oregon,
Idaho and California, the Bank is subject not only to the applicable provisions of Washington law and regulations, but is also subject to
Oregon, Idaho and California law and regulations. These state laws and regulations govern the Bank’s ability to take deposits and pay interest
thereon, to make loans on or invest in residential and other real estate, to make consumer loans, to invest in securities, to offer various
banking services to its clients and to establish branch offices.
Deposit Insurance: The Deposit Insurance Fund of the FDIC insures deposit accounts of the Bank up to $250,000 per separately insured
deposit relationship category. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of, and to
require reporting by, FDIC-insured institutions. Under the FDIC’s rules the assessment base for a bank is equal to its total average
consolidated assets less average tangible capital.
Under the current rules, when the reserve ratio for the prior assessment period reaches, or is greater than 2.0% and less than 2.5%, assessment
rates will range from two basis points to 28 basis points and when the reserve ratio for the prior assessment period is greater than 2.5%,
assessment rates will range from one basis-point to 25 basis points (in each case subject to adjustments as described above for current rates).
No institution may pay a dividend if it is in default on its federal deposit insurance assessment. As of December 31, 2022, assessment rates
ranged from three basis points to 30 basis points for all institutions, subject to adjustments for unsecured debt issued by the institution,
unsecured debt issued by other FDIC-insured institutions, and brokered deposits held by the institution.
Extraordinary growth in insured deposits during the first and second quarters of 2020 caused the Deposit Insurance Fund (DIF) reserve ratio
to decline below the statutory minimum of 1.35 percent as of June 30, 2020. In September 2020, the FDIC Board of Directors adopted a
Restoration Plan to restore the reserve ratio to at least 1.35 percent within eight years, absent extraordinary circumstances, as required by the
Federal Deposit Insurance Act. The Restoration Plan maintained the assessment rate schedules in place at the time and required the FDIC to
update its analysis and projections for the DIF balance and reserve ratio at least semiannually.
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In the semiannual update for the Restoration Plan in June 2022, the FDIC projected that the reserve ratio was at risk of not reaching the
statutory minimum of 1.35 percent by September 30, 2028, the statutory deadline to restore the reserve ratio. Based on this update, the FDIC
Board approved an Amended Restoration Plan, and concurrently proposed an increase in initial base deposit insurance assessment rate
schedules uniformly by 2 basis points, applicable to all insured depository institutions.
In October 2022, the FDIC Board finalized the increase with an effective date of January 1, 2023, applicable to the first quarterly assessment
period of 2023. The revised assessment rate schedules are intended to increase the likelihood that the reserve ratio of the DIF reaches the
statutory minimum level of 1.35 percent by September 30, 2028.
The FDIC conducts examinations of and requires reporting by state non-member banks, such as the Bank. The FDIC also may prohibit any
insured institution from engaging in any activity determined by regulation or order to pose a serious risk to the deposit insurance fund.
The FDIC may terminate the deposit insurance of any insured depository institution if it determines after a hearing that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with the FDIC.
It also may suspend deposit insurance
temporarily during the hearing process for the permanent termination of insurance if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured
for a period of six months to two years, as determined by the FDIC. Management is not aware of any existing circumstances which would
result in termination of the deposit insurance of the Bank.
Standards for Safety and Soundness: The federal banking regulatory agencies have prescribed, by regulation, guidelines for all insured
depository institutions relating to internal controls, information systems and internal audit systems; loan documentation; credit underwriting;
interest rate risk exposure; asset growth; asset quality; earnings; and compensation, fees and benefits. The guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions. Each insured
depository institution must implement a comprehensive written information security program that includes administrative, technical, and
physical safeguards appropriate to the institution’s size and complexity and the nature and scope of its activities. The information security
program must be designed to ensure the security and confidentiality of client information, protect against any unanticipated threats or hazards
to the security or integrity of such information, protect against unauthorized access to or use of such information that could result in
substantial harm or inconvenience to any client, and ensure the proper disposal of client and consumer information. Each insured depository
institution must also develop and implement a risk-based response program to address incidents of unauthorized access to client information
in client information systems. If the FDIC determines that an institution fails to meet any of these guidelines, it may require an institution to
submit to the FDIC an acceptable plan to achieve compliance.
Capital Requirements: Bank holding companies, such as Banner, and federally insured financial institutions, such as the Bank, are required
to maintain a minimum level of regulatory capital.
Banner and the Bank are subject to minimum required ratios for Common Equity Tier 1 (CET1) capital, Tier 1 capital, total capital and the
leverage ratio and a required capital conservation buffer over the required capital ratios.
Under the capital regulations, the minimum capital ratios are: (1) a CET1 capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital
ratio of 6.0% of risk-weighted assets; (3) a total risk-based capital ratio of 8.0% of risk-weighted assets; and (4) a leverage ratio (the ratio of
Tier 1 capital to average total consolidated assets) of 4.0%. CET1 generally consists of common stock; retained earnings; accumulated other
comprehensive income (AOCI) unless an institution elects to exclude AOCI from regulatory capital; and certain minority interests; all subject
to applicable regulatory adjustments and deductions. Tier 1 capital generally consists of CET1 and noncumulative perpetual preferred stock.
Tier 2 capital generally consists of other preferred stock and subordinated debt meeting certain conditions plus an amount of the allowance for
credit losses up to 1.25% of assets. Total capital is the sum of Tier 1 and Tier 2 capital.
Trust preferred securities issued by a bank holding company, such as the Company, with total consolidated assets of less than $15 billion
before May 19, 2010, and treated as regulatory capital are grandfathered, but any such securities issued later are not eligible to be treated as
regulatory capital. If an institution grows above $15 billion as a result of an acquisition, the trust preferred securities are excluded from Tier 1
capital and instead included in Tier 2 capital. Mortgage servicing assets and deferred tax assets over designated percentages of CET1 are
deducted from capital. In addition, Tier 1 capital includes AOCI, which includes all unrealized gains and losses on available for sale debt and
equity securities. However, because of our asset size, we were eligible to elect, and did elect, to permanently opt out of the inclusion of
unrealized gains and losses on available for sale debt and equity securities in our capital calculations.
For purposes of determining risk-based capital, assets and certain off-balance sheet items are risk-weighted from 0% to 1,250%, depending on
the risk characteristics of the asset or item. The regulations include a 150% risk weight (up from 100%) for certain high volatility commercial
real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in
nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year
or less that is not unconditionally cancellable (up from 0%); and a 250% risk weight (up from 100%) for mortgage servicing and deferred tax
assets that are not deducted from capital.
In addition to the minimum CET1, Tier 1, leverage ratio and total capital ratios, Banner and the Bank must maintain a capital conservation
buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based capital levels
in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses.
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To be considered “well capitalized,” a bank holding company must have, on a consolidated basis, a total risk-based capital ratio of 10.0% or
greater and a Tier 1 risk-based capital ratio of 6.0% or greater and must not be subject to an individual order, directive or agreement under
which the FRB requires it to maintain a specific capital level. To be considered “well capitalized,” a depository institution must have a Tier 1
risk-based capital ratio of at least 8.0%, a total risk-based capital ratio of at least 10.0%, a CET1 capital ratio of at least 6.5% and a leverage
ratio of at least 5.0% and not be subject to an individualized order, directive or agreement under which its primary federal banking regulator
requires it to maintain a specific capital level.
Upon adoption of CECL, a banking organization must record a one-time adjustment to its credit loss allowances as of the beginning of the
fiscal year of adoption equal to the difference, if any, between the amount of credit loss allowances under the prior methodology and the
amount required under CECL. Concurrent with enactment of the CARES Act, federal banking agencies issued an interim final rule that
delayed the estimated impact on regulatory capital resulting from the adoption of CECL. The interim final rule provides banking
organizations that implement CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory
capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase
out the aggregate amount of capital benefit provided during the initial two-year delay. The changes in the final rule apply only to those
banking organizations that elect the CECL transition relief provided under the rule. Banner and the Bank elected this option.
Prompt Corrective Action: Federal statutes establish a supervisory framework for FDIC-insured institutions based on five capital
categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An
institution’s category depends upon where its capital levels are in relation to relevant capital measures. The well-capitalized category is
described above. An institution that is not well capitalized is subject to certain restrictions on brokered deposits, including restrictions on the
rates it can offer on its deposits generally. To be considered adequately capitalized, an institution must have the minimum capital ratios
described above. Any institution which is neither well capitalized nor adequately capitalized is considered undercapitalized.
Undercapitalized institutions are subject to certain prompt corrective action requirements, regulatory controls and restrictions which become
more extensive as an institution becomes more severely undercapitalized. Failure by the Bank to comply with applicable capital requirements
would, if unremedied, result in progressively more severe restrictions on its activities and lead to enforcement actions, including, but not
limited to, the issuance of a capital directive to ensure the maintenance of required capital levels and, ultimately, the appointment of the FDIC
as receiver or conservator. Banking regulators will take prompt corrective action with respect to depository institutions that do not meet
minimum capital requirements. Additionally, approval of any regulatory application filed for their review may be dependent on compliance
with capital requirements. As of December 31, 2022, Banner and the Bank met the requirements to be “well capitalized” and the capital
conservation buffer requirements.
Commercial Real Estate Lending Concentrations: The federal banking agencies have issued guidance on sound risk management practices
for concentrations in commercial real estate lending. The particular focus is on exposure to commercial real estate loans that are dependent
on the cash flow from the real estate held as collateral and that are likely to be sensitive to conditions in the commercial real estate market (as
opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is not
to limit a bank’s commercial real estate lending but to guide banks in developing risk management practices and capital levels commensurate
with the level and nature of real estate concentrations. The guidance directs the FDIC and other bank regulatory agencies to focus their
supervisory resources on institutions that may have significant commercial real estate loan concentration risk. A bank that has experienced
rapid growth in commercial real estate lending, has notable exposure to a specific type of commercial real estate loan, or is approaching or
exceeding the following supervisory criteria may be identified for further supervisory analysis with respect to real estate concentration risk:
• Total reported loans for construction, land development and other land represent 100% or more of the bank’s total regulatory capital;
or
• Total commercial real estate loans (as defined in the guidance) represent 300% or more of the bank’s total regulatory capital and the
outstanding balance of the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months.
The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be
taken into account in supervisory guidance on evaluation of capital adequacy. As of December 31, 2022, the Bank’s aggregate recorded loan
balances for construction, land development and land loans were 88% of total regulatory capital. In addition, at December 31, 2022, the
Bank’s loans secured by commercial real estate represent 268% of total regulatory capital.
Activities and Investments of Insured State-Chartered Financial Institutions: Federal law generally limits the activities and equity
investments of FDIC insured, state-chartered banks to those that are permissible for national banks. An insured state bank is not prohibited
from, among other things, (1) acquiring or retaining a majority interest in a subsidiary, (2) investing as a limited partner in a partnership the
sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the bank’s total assets, (3) acquiring up to 10% of the voting stock
of a company that solely provides or re-insures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group
insurance coverage for insured depository institutions, and (4) acquiring or retaining the voting shares of a depository institution if certain
requirements are met.
17
Washington State has enacted laws regarding financial institution parity. These laws afford Washington-chartered commercial banks the
same powers as Washington-chartered savings banks and provide that Washington-chartered commercial banks may exercise any of the
powers that the Federal Reserve has determined to be closely related to the business of banking and the powers of national banks, subject to
the approval of the Director in certain situations. Finally, the law provides additional flexibility for Washington-chartered banks with respect
to interest rates on loans and other extensions of credit. Specifically, they may charge the maximum interest rate allowable for loans and
other extensions of credit by federally-chartered financial institutions.
Environmental Issues Associated With Real Estate Lending: The Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA) is a federal statute that generally imposes strict liability on all prior and present “owners and operators” of sites containing
hazardous waste. However, Congress acted to protect secured creditors by providing that the term “owner and operator” excludes a person
whose ownership is limited to protecting its security interest in the site. Since the enactment of the CERCLA, this “secured creditor
exemption” has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for cleanup costs
on contaminated property that they hold as collateral for a loan. To the extent that legal uncertainty exists in this area, all creditors, including
the Bank, that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could
be subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property.
Federal Reserve System: The Federal Reserve has the authority to establish reserve requirements on transaction accounts or non-personal
time deposits. These reserves may be in the form of cash or non-interest-bearing deposits with the regional Federal Reserve Bank. Interest-
bearing checking accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of
transaction accounts and are subject to Regulation D reserve requirements, as are any non-personal time deposits at a bank. In response to
COVID-19, the Federal Reserve reduced requirements to zero percent effective on March 26, 2020, to support lending to households and
businesses. Currently, the Federal Reserve has stated it has no plans to re-impose reserve requirements. However, the Federal Reserve may
adjust reserve requirement ratios in the future if conditions warrant.
Affiliate Transactions: Banner and the Bank are separate and distinct legal entities. Banner (and any non-bank subsidiary of Banner) is an
affiliate of the Bank. Federal laws strictly limit the ability of banks to engage in certain transactions with their affiliates. Transactions
deemed to be a “covered transaction” under Section 23A of the Federal Reserve Act between a bank and an affiliate are limited to 10% of the
bank’s capital and surplus and, with respect to all affiliates, to an aggregate of 20% of the bank’s capital and surplus. Further, covered
transactions that are loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal
law also requires that covered transactions and certain other transactions listed in Section 23B of the Federal Reserve Act between a bank and
its affiliates be on terms as favorable to the bank as transactions with non-affiliates.
Community Reinvestment Act: The Bank is subject to the provisions of the Community Reinvestment Act of 1977 (CRA), which requires the
appropriate federal banking regulatory agency to assess a bank’s performance under the CRA in meeting the credit needs of the community
serviced by the bank, including low and moderate income neighborhoods. The regulatory agency’s assessment of the bank’s record is made
available to the public. Further, a bank’s CRA performance rating must be considered in connection with a bank’s application to, among
other things, establish a new branch office that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the
assets or assume the liabilities of, a federally regulated financial institution. The Bank received an “outstanding” rating during its most
recently completed CRA examination.
Dividends: The amount of dividends payable by the Bank to the Company depends upon its earnings and capital position, and is limited by
federal and state laws, regulations and policies, including the capital conservation buffer requirement. Federal law further provides that no
insured depository institution may make any capital distribution (which includes a cash dividend) if, after making the distribution, the
institution would be “undercapitalized,” as defined in the prompt corrective action regulations. Moreover, the federal bank regulatory
agencies also have the general authority to limit the dividends paid by insured banks if such payments should be deemed to constitute an
unsafe and unsound practice. In addition, under Washington law, no bank may declare or pay any dividend in an amount greater than its
retained earnings without the prior approval of the Washington DFI. The Washington DFI also has the power to require any bank to suspend
the payment of any and all dividends.
Privacy Standards and Cybersecurity: The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (GLBA) modernized the
financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies,
securities firms and other financial service providers. Federal banking agencies, including the FDIC, have adopted guidelines for establishing
information security standards and cybersecurity programs for implementing safeguards under the supervision of the board of directors.
These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information
technology and the use of third parties in the provision of financial services. These regulations require the Bank to disclose its privacy policy,
including informing consumers of its information sharing practices and informing consumers of their rights to opt out of certain practices. In
addition, other state cybersecurity and data privacy laws and regulations may expose the Bank to risk and result in certain risk management
costs.
18
The California Consumer Privacy Act of 2018 (the CCPA), which became effective on January 1, 2020, gives California residents the right to
request disclosure of information collected about them, and whether that information has been sold or shared with others, the right to request
deletion of personal information (subject to certain exceptions), the right to opt out of the sale of personal information, and the right not to be
discriminated against for exercising these rights. The CCPA also created a private right of action with statutory damages for data security
breaches, thereby increasing potential liability associated with a data breach, which has triggered a number of class actions against other
companies since January 1, 2020. Although the Bank may enjoy several fairly broad exemptions from the CCPA’s privacy requirements,
those exemptions do not extend to the private right of action for a data security breach. In November 2020, voters in the State of California
approved the California Privacy Rights Act (CPRA), a ballot measure that amends and supplements the substantive requirements of the
CCPA, as well as providing certain mechanisms for administration and enforcement of the statute by creating the California Privacy
Protection Agency, a watchdog privacy agency. The CCPA, the CPRA as well as other similar state data privacy laws and regulations, may
require the establishment by the Bank of certain regulatory compliance and risk management controls. Non-compliance with the CCPA, the
CPRA or similar state privacy laws and regulations could lead to substantial regulatory imposed fines and penalties, damages from private
causes of action and/or reputational harm.
In addition, Congress and federal regulatory agencies are considering similar laws or regulations that could create new individual privacy
rights and impose increased obligations on companies handling personal data. On November 18, 2021, the federal banking agencies
announced the issuance of a new rule, effective April 1, 2022, providing for new notification requirements for banking organizations and their
service providers for significant cybersecurity incidents. Specifically, the new rule requires banking organizations to notify their primary
federal regulator as soon as possible, and not later than 36 hours after, the discovery of a computer-security incident that rises to the level of a
notification incident within the meaning attributed to those terms by the rule. Notification is required for incidents that have materially
affected or are reasonably likely to materially affect the viability of a banking organization’s operations, its ability to deliver banking products
and services, or the stability of the financial sector. Service providers are required under the rule to notify any affected bank to which it
provides services as soon as possible when it determines it has experienced a computer-security incident that has materially disrupted or
degraded, or is reasonably likely to materially disrupt or degrade, covered services provided by that entity to the bank for four or more hours.
Anti-Money Laundering and Client Identification: The Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) was signed into law on October 26, 2001. The USA PATRIOT and Bank
Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and
terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s
Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and
verifying the identity of clients seeking to open new financial accounts, and the beneficial owners of accounts. Bank regulators are directed to
consider an institution’s effectiveness in combating money laundering when ruling on Bank Holding Company Act and Bank Merger Act
applications. The Bank’s policies and procedures are designed to comply with the requirements of the USA Patriot Act.
Other Consumer Protection Laws and Regulations: The CFPB is empowered to exercise broad regulatory, supervisory and enforcement
authority with respect to both new and existing consumer financial protection laws. The Bank and its affiliates and subsidiaries are subject to
CFPB supervisory and enforcement authority.
The Bank is subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of its
business relationships with consumers. While the list set forth below is not exhaustive, these include the Truth-in-Lending Act, the Truth in
Savings Act, the Electronic Fund Transfers Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing
Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Right to Financial
Privacy Act, the Home Ownership and Equity Protection Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check
Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of
insurance, federal and state laws prohibiting unfair and deceptive business practices, and various regulations that implement some or all of the
foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must
deal with clients when taking deposits, making loans, collecting loans, and providing other services. Failure to comply with these laws and
regulations can subject the Bank to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil liability,
criminal penalties, punitive damages, and the loss of certain contractual rights.
Banner Corporation
General: Banner, as sole shareholder of the Bank, is a bank holding company registered with the Federal Reserve. Bank holding companies
are subject to comprehensive regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended, or the BHCA,
and the regulations of the Federal Reserve. We are required to file quarterly reports with the Federal Reserve and provide additional
information as the Federal Reserve may require. The Federal Reserve may examine us, and any of our subsidiaries, and charge us for the cost
of the examination. The Federal Reserve also has extensive enforcement authority over bank holding companies, including, among other
things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest
subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and
unsafe or unsound practices. Banner is also required to file certain reports with, and otherwise comply with the rules and regulations of the
SEC.
19
The Bank Holding Company Act: Under the BHCA, Banner is supervised by the Federal Reserve. The Federal Reserve has a policy that a
bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its
operations in an unsafe or unsound manner. In addition, the Dodd-Frank Act provides that a bank holding company must serve as a source of
financial strength to its subsidiary banks. A bank holding company’s failure to meet its obligation to serve as a source of strength to its
subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the
Federal Reserve’s regulations or both. No regulations have yet been proposed by the Federal Reserve to implement the source of strength
provisions of the Dodd-Frank Act. Banner and any subsidiaries that it may control are considered “affiliates” of the Bank within the meaning
of the Federal Reserve Act, and transactions between the Bank and affiliates are subject to numerous restrictions. With some exceptions,
Banner and its subsidiaries are prohibited from tying the provision of various services, such as extensions of credit, to other services offered
by Banner or by its affiliates.
Acquisitions: The BHCA prohibits a bank holding company, with certain exceptions, from acquiring ownership or control of more than 5%
of the voting shares of any company that is not a bank or bank holding company and from engaging in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. Under the BHCA, the Federal Reserve may approve the ownership
of shares by a bank holding company in any company, the activities of which the Federal Reserve has determined to be so closely related to
the business of banking or managing or controlling banks as to be a proper incident thereto. These activities include: operating a savings
institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations;
providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance;
leasing property on a full-payout, non-operating basis; selling money orders, travelers’ checks and U.S. Savings Bonds; real estate and
personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities
brokerage services for clients.
Federal Securities Laws: Banner’s common stock is registered with the SEC under Section 12(b) of the Securities Exchange Act of 1934, as
amended. We are subject to information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange
Act of 1934 (the Exchange Act).
The Dodd-Frank Act: The Dodd-Frank Act imposes various restrictions and an expanded framework of regulatory oversight for financial
institutions, including depository institutions, and implements certain capital regulations applicable to Banner and the Bank that are discussed
above under the section entitled “Capital Requirements.”
In addition, among other changes, the Dodd-Frank Act requires public companies, like Banner, to (i) provide their shareholders with a non-
binding vote (a) at least once every three years on the compensation paid to executive officers and (b) at least once every six years on whether
they should have a “say on pay” vote every one, two or three years; (ii) have a separate, non-binding shareholder vote regarding golden
parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that
would trigger the parachute payments; (iii) provide disclosure in annual proxy materials concerning the relationship between the executive
compensation paid and the financial performance of the issuer; and (iv) disclose the ratio of the Chief Executive Officer’s annual total
compensation to the median annual total compensation of all other employees.
The regulations to implement the provisions of Section 619 of the Dodd-Frank Act, commonly referred to as the Volcker Rule, contain
prohibitions and restrictions on the ability of financial institutions holding companies and their affiliates to engage in proprietary trading and
to hold certain interests in, or to have certain relationships with, various types of investment funds, including hedge funds and private equity
funds. Banner is continuously reviewing its investment portfolio to determine if changes in its investment strategies are in compliance with
the various provisions of the Volcker Rule regulations.
Interstate Banking and Branching: The Federal Reserve must approve an application of a bank holding company to acquire control, or
acquire all or substantially all of the assets, of a bank located in a state other than the holding company’s home state, without regard to
whether the transaction is prohibited by the laws of any state. The Federal Reserve may not approve the acquisition of a bank that has not
been in existence for the minimum time period (not exceeding five years) specified by the statutory law of the host state. Nor may the Federal
Reserve approve an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the
insured deposits in the United States or 30% or more of the deposits in the target bank’s home state or in any state in which the target bank
maintains a branch. Federal law does not affect the authority of states to limit the percentage of total insured deposits in the state which may
be held or controlled by a bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30% state-wide concentration limit contained in the federal law.
The federal banking agencies are generally authorized to approve interstate merger transactions without regard to whether the transaction is
prohibited by the law of any state. Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located
permits such acquisitions.
Interstate mergers and branch acquisitions are subject to the nationwide and statewide insured deposit
concentration amounts described above. Under the Dodd-Frank Act, the federal banking agencies may generally approve interstate de novo
branching.
20
Dividends: The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses
its view that although there are no specific regulations restricting dividend payments by bank holding companies other than state corporate
laws, a bank holding company must maintain an adequate capital position and generally should not pay cash dividends unless the company’s
net income for the past year is sufficient to fully fund the cash dividends and that the prospective rate of earnings appears consistent with the
company’s capital needs, asset quality, and overall financial condition. The Federal Reserve policy statement also indicates that it would be
inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. The capital conversion buffer
requirement can also restrict Banner’s and the Bank’s ability to pay dividends. Further, under Washington law, Banner is prohibited from
paying a dividend if, after making such dividend payment, it would be unable to pay its debts as they become due in the usual course of
business, or if its total liabilities, plus the amount that would be needed in the event Banner were to be dissolved at the time of the dividend
payment, to satisfy preferential rights on dissolution of holders of preferred stock ranking senior in right of payment to the capital stock on
which the applicable distribution is to be made, exceed our total assets.
Stock Repurchases: A bank holding company, except for certain “well-capitalized” and highly rated bank holding companies, is required to
give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for
the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding twelve
months, is equal to 10% or more of its consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it
determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order or
any condition imposed by, or written agreement with, the Federal Reserve.
Executive Officers
Management Personnel
The following table sets forth information with respect to the executive officers of Banner Corporation and Banner Bank as of December 31,
2022:
Name
Mark J. Grescovich
Janet M. Brown
Peter J. Conner
James M. Costa
James P. Garcia
Kayleen R. Kohler
Kenneth A. Larsen
Sherrey Luetjen
James P. G. McLean
Cynthia D. Purcell
M. Kirk Quillin
James T. Reed, Jr.
Jill M. Rice
Age
58
55
57
54
63
50
53
51
58
65
60
60
57
Position with Banner Bank
Position with Banner Corporation
President, Chief Executive Officer, Director President, Chief Executive Officer, Director
Executive Vice President, Chief Information
Officer
Executive Vice President, Chief Financial
Officer
Executive Vice President, Chief Risk Officer
Executive Vice President, Chief Financial
Officer, Treasurer
Executive Vice President, General Counsel,
Ethics Officer, Secretary
Executive Vice President, Chief Audit
Executive
Executive Vice President, Human Resources,
Chief Diversity Officer
Executive Vice President, Mortgage Banking
Executive Vice President, General Counsel,
Secretary
Executive Vice President, Commercial Real
Estate Lending Division
Executive Vice President, Chief Strategy and
Administration Officer
Executive Vice President, Chief Commercial
Executive
Executive Vice President, Commercial Banking
Executive Vice President, Chief Credit Officer
21
Biographical Information
Set forth below is certain information regarding the executive officers of Banner Corporation and Banner Bank. There are no family
relationships among or between the directors or executive officers.
Mark J. Grescovich is President and Chief Executive Officer, and a director, of Banner Corporation and Banner Bank. Mr. Grescovich joined
Banner Bank in April 2010 and became Chief Executive Officer in August 2010 following an extensive banking career specializing in
finance, credit administration and risk management. Under his leadership, Banner has grown from $4.7 billion in assets in 2010 to more than
$15 billion through organic growth as well as selective acquisitions. During that time, Mr. Grescovich has guided the expansion of the
Company’s footprint to over 135 locations in four states. Prior to joining the Bank, Mr. Grescovich was the Executive Vice President and
Chief Corporate Banking Officer for Akron, Ohio-based FirstMerit Corporation and FirstMerit Bank N.A., a commercial bank with $14.5
billion in assets and over 200 branch offices in three states. He assumed responsibility for FirstMerit’s commercial and regional line of
business in 2007, having served since 1994 in various commercial and corporate banking positions, including that of Chief Credit Officer.
Prior to joining FirstMerit, Mr. Grescovich was a Managing Partner in corporate finance with Sequoia Financial Group, Inc. of Akron, Ohio
and a commercial and corporate lending officer and credit analyst with Society National Bank of Cleveland, Ohio. He has a Bachelor of
Business Administration degree in finance from Miami University and a Master of Business Administration degree, also in finance, from The
University of Akron.
Janet M. Brown joined Banner Bank in December 2020 as Chief Information Officer. She provides direction and oversight for information
technology and security across Banner Bank, including existing and emerging initiatives. Prior to joining the Company, Ms. Brown’s career
included more than 25 years of information technology experience. She has specific expertise leading large, complex projects and technology
environments. Ms. Brown served as Vice President of Governance & Infrastructure Shared Services at Epiq Global, a worldwide provider of
legal services, in the Seattle, WA office from November 2018 through October 2020. In June 2018, Epiq Global purchased Garden City
Group, where Ms. Brown had served as Senior Vice President and Chief Information Officer since September 2016 (also in Seattle, WA).
From March 2014 to September 2016, Ms. Brown was Vice President, Information Technology Applications for Premera (Mountlake
Terrace, WA), where she had previously served as Information Technology Director, Strategic Services. Ms. Brown attended Washington
State University and served eight years in the U.S. Marine Corps. She is a Desert Storm Veteran. Ms. Brown is an active volunteer in several
children’s welfare and development causes in the Puget Sound area and abroad.
Peter J. Conner joined Banner Bank in 2015 upon the acquisition of AmericanWest Bank (AmericanWest). He is Executive Vice President
and Chief Financial Officer of Banner Corporation and Banner Bank. Prior to joining the Company, Mr. Conner was the Chief Financial
Officer for SKBHC LLC in Seattle, WA the holding company for Starbuck Bancshares, Inc. (Starbuck), the holding company for
AmericanWest, and AmericanWest from 2010 until he joined Banner Bank in 2015. Mr. Conner has over 30 years of experience in financial
services, including 20 years in executive financial positions at Wells Fargo Bank as well as regional community banks. Additionally, he spent
time as a managing director for FSI Group, where he evaluated and placed equity fund investments in community banks. He earned a B.S. in
Quantitative Economics from the University of California at San Diego and a Master’s of Business degree from the Haas School of Business
at U.C. Berkeley. Mr. Conner’s community involvement includes having served as chairman of the board of directors for Spokane Habitat for
Humanity.
James M. Costa joined Banner Bank in October 2021 as Executive Vice President and Chief Risk Officer. He brings nearly 30 years of
banking experience to his position. Prior to joining Banner, Mr. Costa served at Mann Lake Group in Minneapolis as the Chief Executive
Officer and Founder from October 2020 where he provided advice to banks, trade associations and fintech firms on credit strategy, capital
allocation, risk program design, regulatory relations, and compliance risk management. From 2013 through October 2020, he served as an
executive officer of TCF Financial Corporation (TCF) in Wayzata, MN, including as Executive Vice President and Chief Risk Officer and
Chief Credit Officer from August 2019, as Chief Risk Officer and Chief Credit Officer from January 2017, and as Chief Risk Officer since
August 2013. TCF was a $49 billion regional bank holding company with operations in USA, Canada and Asia. Prior to that, Mr. Costa was
Executive Vice President and Head of Credit Strategy for Wachovia in Charlotte, NC, and PNC Financial Corp. in Pittsburgh, PA. A U.S. Air
Force veteran, Mr. Costa earned his bachelor’s degree from The Ohio State University and conducted his doctorate studies in Economics with
the University of Minnesota. He is an active community volunteer with a local Habitat for Humanity and Humane Society, as well as with the
University of Minnesota Center for Children’s Cancer Research. Mr. Costa is also an advisory board member for the Midsize Bank Coalition
of America.
James P. Garcia is the Chief Audit Executive responsible for proactively identifying and mitigating risks as well as providing internal audit
services in the areas of financial compliance, IT Governance, and operations. He has more than 40 years of experience in the financial
services industry. Prior to joining the Company in 2017, Mr. Garcia served for 16 years at the Bank of Hawaii in Honolulu, HI, most recently
as Executive Vice President and Chief Audit Executive, with prior positions as Vice President and Senior Audit Manager. Mr. Garcia also
has 24 years of experience at Bank of America where he held several positions in consumer and commercial operations management and
audit, including that of Audit Director. Mr. Garcia earned his bachelor’s degree in management from St. Mary’s College of California and is
a graduate of the School of Mortgage Banking. He is a Certified Bank Auditor (CBA), holds a Certification in Risk Management Assurance
(CRMA) and is a Certified Information Systems Auditor (CISA). Mr. Garcia is an active member in the Institute of Internal Audit, the
Information Systems Audit and Control Association, and Mid-Sized Bank Coalition of America.
22
Kayleen R. Kohler joined Banner Bank in 2016 as Executive Vice President of Human Resources and, in January 2021, was also appointed as
the Bank’s Chief Diversity Officer. Ms. Kohler’s focus is on driving organizational design priorities at Banner Bank including: leadership
development, talent acquisition, workforce planning, employee relations, compensation, benefits, diversity initiatives, payroll, and safety.
Prior to joining Banner, Ms. Kohler served 20 years in progressive human resource leadership roles for Plum Creek Timber Company, now
Weyerhaeuser, in Seattle, WA. She holds bachelors’ degrees in Marketing as well as Business Management from Northwest Missouri State
University and a master’s degree in Organizational Management from the University of Phoenix. Through continuing education, she
maintains her certifications as a Senior Professional in Human Resources (SPHR) and a Society of Human Resources Management Senior
Certified Professional (SHRM-SCP).
Kenneth A. Larsen joined Banner Bank in 2005 as the Real Estate Administration Manager and was promoted to Mortgage Banking Director
in 2010. Mr. Larsen is responsible for Banner Bank’s mortgage banking activities from origination, administration, secondary marketing,
through loan servicing. Mr. Larsen has had a 30-plus year career in mortgage banking, including holding positions in all facets of operations
and management. A graduate of Eastern Washington University, he earned a Bachelor of Arts in Education with a degree in Social Science
and earned certificates from the Pacific Coast Banking School and the School of Mortgage Banking. He is also a Certified Mortgage Banker,
the highest designation recognized by the Mortgage Bankers Association. Mr. Larsen began his career at Action Mortgage/Sterling Savings,
later moving to Peoples Bank of Lynden where he managed the mortgage banking operation. Mr. Larsen also served as the 90th President of
the Seattle Mortgage Bankers Association. Formerly he was the Chairman of the Washington Mortgage Bankers Association and currently
serves as a commissioner on the Washington State Housing Finance Commission. He was promoted to Executive Vice President in 2015.
Sherrey Luetjen is Executive Vice President, General Counsel and Secretary for Banner Corporation and Banner Bank, as well as Ethics
Officer for Banner Corporation. She joined Banner as Senior Vice President and Assistant General Counsel in May 2019 and was promoted to
her current position in August 2021. Ms. Luetjen is responsible for directing and overseeing the company’s legal functions. Ms. Luetjen has
more than 20 years of legal experience including more than 15 years as in-house counsel in the financial services industry. From 2010 through
2018, Ms. Luetjen was a Managing Director of Legal and Compliance at BlackRock, Inc. in Seattle, where she had served as a Director of
Legal and Compliance from 2007 through 2010. Prior to BlackRock, Ms. Luetjen served as Associate General Counsel at a privately held
investment advisory firm. Ms. Luetjen earned concurrent JD and MBA degrees from the University of Washington and earned her bachelor’s
degree from Seattle University. Ms. Luetjen’s community involvement includes nine years of service on the board of directors of The
Arboretum Foundation, including two years as board chair.
James P.G. McLean joined Banner Bank in November 2010 and is Executive Vice President, Commercial Real Estate Lending, leading teams
including the Multifamily Lending Group, Commercial Real Estate Specialty Unit, Affordable Housing and LIHTC Investments, Community
Financial Corporation, Residential Construction and Income Property Divisions, as well as loan administration functions related to this
division. Mr. McLean has more than 30 years of real estate finance experience. His experience includes roles at large national commercial
banks and at regional and community banks, as well as 15 years in executive leadership roles and as a principal of a mid-sized regional
commercial real estate development firm. Mr. McLean earned his bachelor’s degree from the University of Washington. His community
volunteering is focused on organizations that serve local youth, including the Boy Scouts of America, Lake Washington School District and
numerous coaching positions.
Cynthia D. Purcell is Banner Bank’s Executive Vice President and Chief Strategy and Administration Officer, having previously served as
Banner Bank’s Executive Vice President of Retail Banking and Administration. Ms. Purcell is responsible for leading the execution of the
Bank’s long-term corporate strategic objectives in addition to leading the community banking, residential lending, digital strategy and
delivery channels as well as a number of operational and administrative functions for Banner Bank. She was formerly the Chief Financial
Officer of Inland Empire Bank (now Banner Bank), which she joined in 1981. Over her banking career, Ms. Purcell has been deeply involved
in advocating for the industry through leadership roles on various boards and committees including State Banking Associations and the
American Bankers Association (ABA). She has also taught banking courses throughout her career, including the ABA Graduate School of
Bank Investments and Financial Management, the Northwest Intermediate Banking School, and the Oregon Bankers Association Directors
College.
M. Kirk Quillin joined Banner Bank’s commercial banking group in 2002 and now serves as Chief Commercial Banking Executive. Mr.
Quillin began his career in the banking industry in 1984 with Idaho First National Bank, which is now U.S. Bank. His career also included
management positions in commercial lending with Washington Mutual. He earned a B.S. in Finance and Economics from Boise State
University and was certified by the Pacific Coast Banking School and Northwest Intermediate Commercial Lending School. As a dedicated,
civic-minded community member, Mr. Quillin was active in Rotary for over 20 years, and for eight years served as a Fire Commissioner.
James T. Reed, Jr. began his banking career in 1985 and joined Banner Bank in 1998. Since then he has held several leadership positions
with progressive responsibilities within the Commercial Banking division. Today, as Executive Vice President, Commercial Banking, Mr.
Reed leads the teams that focus on commercial banking relationship management, portfolio management, and business development. Mr.
Reed earned his bachelor’s degree from the University of Washington and is a graduate of Pacific Coast Banking School. Mr. Reed’s
community involvement includes serving on the Association of Washington Businesses Executive Board as well as having served on the
University of Washington Bothell Advisory Board.
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Jill M. Rice joined Banner Bank in 2002 as a Regional Credit Risk Manager, later promoted to Senior Credit Officer overseeing the
commercial banking credit function in 2008, and promoted to Chief Credit Officer in 2020. In all, Ms. Rice has more than 30 years of credit-
related experience, including time as a Senior Bank Examiner with the FDIC. Ms. Rice earned her bachelor’s degree from Western
Washington University, is a graduate of the Pacific Coast Banking School, and has held the RMA Credit Risk Certification since 2009. For
more than a decade, Ms. Rice’s community involvement includes having served on the board of directors for the Alzheimer’s Association
Washington State Chapter, and volunteering with both the Snoqualmie Valley and Tahoma School Districts. Additionally, for more than a
decade, she has engaged with LifeWire, a domestic violence prevention organization, including serving seven years on the board of directors,
two of which she was the board president.
Corporate Information
Our principal executive offices are located at 10 South First Avenue, Walla Walla, Washington 99362. Our telephone number is (509)
527-3636. We maintain a website with the address www.bannerbank.com. The information contained on our website is not included as a
part of, or incorporated by reference into, this Annual Report on Form 10-K. Other than an investor’s own Internet access charges, we make
available free of charge through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form
8-K, and amendments to these reports, as soon as reasonably practicable after we have electronically filed such material with, or furnished
such material to, the SEC.
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Item 1A – Risk Factors
An investment in our common stock is subject to risks inherent in our business. Before making an investment decision, you should
carefully consider the risks and uncertainties described below together with all of the other information included in this report. The
risks described below are not the only ones we face. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially and adversely affect our business, financial condition, capital levels, cash flows,
liquidity, results of operations and prospects. The market price of our common stock could decline significantly due to any of these
identified or other risks, and you could lose some or all of your investment. The risks discussed below also include forward-looking
statements, and our actual results may differ substantially from those discussed in these forward-looking statements. This report is
qualified in its entirety by these risk factors.
Risks Related to Macroeconomic Conditions
Our business may be adversely affected by downturns in the national economy and the regional economies on which we depend.
Our operations are significantly affected by national and regional economic conditions. Weakness in the national economy or the economies
of the markets in which we operate could have a material adverse effect on our financial condition, results of operations and prospects. We
provide banking and financial services primarily to businesses and individuals in the states of Washington, Oregon, California and Idaho. All
of our branches and most of our deposit clients are also located in these four states. Further, as a result of a high concentration of our client
base in the Puget Sound area and eastern Washington state regions, the deterioration of businesses in these areas, or one or more businesses
with a large employee base in these areas, could have a material adverse effect on our business, financial condition, liquidity, results of
operations and prospects. Weakness in the global economy has adversely affected many businesses operating in our markets that are
dependent upon international trade and it is not known how changes in tariffs being imposed on international trade may also affect these
businesses. In addition, adverse weather conditions as well as decreases in market prices for agricultural products grown in our primary
markets can adversely affect agricultural businesses in our markets. As we expand our presence in areas such as San Diego and Sacramento,
and throughout California, we will be exposed to concentration risks in those areas as well.
A deterioration in economic conditions in the markets we serve as a result of inflation, a recession, the effects of COVID-19 variants or other
factors could result in the following consequences, any of which could have a material adverse effect on our business, financial condition,
liquidity and results of operations:
loan delinquencies, problem assets and foreclosures may increase;
• demand for our products and services may decline;
•
• we may increase our allowance for credit losses;
• collateral for loans, especially real estate, may decline in value, in turn reducing clients’ borrowing power, reducing the value of
assets and collateral associated with existing loans;
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; and
the amount of our low-cost or non-interest-bearing deposits may decrease.
•
•
A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger
financial institutions whose real estate loans are more geographically diverse. Many of the loans in our portfolio are secured by real estate.
Deterioration in the real estate markets where collateral for a loan is real property could negatively affect the borrower’s ability to repay the
loan and the value of the collateral securing the loan. Real estate values are affected by various other factors, including changes in general or
regional economic conditions, governmental rules or policies and natural disasters such as earthquakes, flooding and tornadoes. If we are
required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability
could be adversely affected.
Adverse changes in the regional and general economy could reduce our growth rate, impair our ability to collect loans and generally have a
negative effect on our financial condition and results of operations.
External economic factors, such as changes in monetary policy and inflation and deflation, may have an adverse effect on our
business, financial condition and results of operations.
Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly the Board of Governors of
the Federal Reserve System, or the Federal Reserve. Actions by monetary and fiscal authorities, including the Federal Reserve, could lead to
inflation, deflation, or other economic phenomena that could adversely affect our financial performance. Inflation has risen sharply since the
end of 2021 and throughout 2022 at levels not seen for over 40 years. Inflationary pressures are currently expected to remain elevated
throughout 2023. Small to medium-sized businesses may be impacted more during periods of high inflation as they are not able to leverage
economics of scale to mitigate cost pressures compared to larger businesses. Consequently, the ability of our business clients to repay their
loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of operations and
financial condition. Furthermore, a prolonged period of inflation could cause wages and other costs to the Company to increase, which could
adversely affect our results of operations and financial condition. Virtually all of our assets and liabilities are monetary in nature. As a result,
interest rates tend to have a more significant impact on our performance than general levels of inflation or deflation. Interest rates do not
necessarily move in the same direction or by the same magnitude as the prices of goods and services.
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The economic impact of the COVID-19 pandemic could continue to affect our financial condition and results of operations.
The COVID-19 pandemic has adversely impacted the global and national economy and certain industries and geographies in which our
clients operate. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-19 pandemic on the business of
the Company, its clients, employees and third-party service providers. The extent of such impact will depend on future developments, which
are highly uncertain. Additionally, the responses of various governmental and nongovernmental authorities and consumers to the pandemic
may have material long-term effects on the Company and its clients which are difficult to quantify in the near-term or long-term.
We could be subject to a number of risks as the result of the COVID-19 pandemic, any of which could have a material, adverse effect on our
business, financial condition, liquidity, results of operations, ability to execute our growth strategy, and ability to pay dividends. These risks
include, but are not limited to, changes in demand for our products and services; increased credit losses or other impairments in our loan
portfolios and increases in our allowance for credit losses; a decline in collateral for our loans, especially real estate; unanticipated
unavailability of employees; increased cyber security risks as employees work remotely; a prolonged weakness in economic conditions
resulting in a reduction of future projected earnings could necessitate a valuation allowance against our current outstanding deferred tax
assets; a triggering event leading to impairment testing on our goodwill or core deposit and customer relationships intangibles, which could
result in an impairment charge; and increased costs as the Company and our regulators, customers and vendors adapt to evolving pandemic
conditions.
Risks Related to Credit and Lending
Our loan portfolio includes loans with a higher risk of loss.
In addition to our first-lien one- to four-family residential real estate lending, we originate construction and land loans, commercial and
multifamily mortgage loans, commercial business loans, agricultural mortgage loans and agricultural loans, and consumer loans, primarily
within our market areas, which generally involve a higher risk of loss than first-lien one- to four-family residential real estate lending. We
had $8.97 billion outstanding in these types of higher risk loans, excluding SBA PPP loans, at December 31, 2022, compared to $8.29 billion
at December 31, 2021, which typically present different risks to us than our first-lien one- to four-family residential real estate for a number of
reasons, including the following:
• Construction and Land Loans. At December 31, 2022, construction and land loans were $1.49 billion, or 15% of our total loan
portfolio. This type of lending is subject to the inherent difficulties in estimating both a property’s value at completion of a project
and the estimated cost (including interest) of the project. Because of the uncertainties inherent in estimating construction costs, as
well as the market value of a completed project and the effects of governmental regulation on real property, it is relatively difficult to
evaluate accurately the total funds required to complete a project and the completed project’s loan-to-value ratio. If the estimate of
construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to ensure
completion of the project. If our appraisal of the value of a completed project proves to be overstated, we may have inadequate
security for the repayment of the loan upon completion of construction of the project and may incur a loss. Disagreements between
borrowers and builders and the failure of builders to pay subcontractors may also jeopardize projects. This type of lending also
typically involves higher loan principal amounts and may be concentrated with a small number of builders. A downturn in housing,
or the real estate market, could increase delinquencies, defaults and foreclosures, and significantly impair the value of our collateral
and our ability to sell the collateral upon foreclosure. Many of the builders we deal with have more than one loan outstanding with
us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater
risk of loss. In addition, during the term of some of our construction loans, no payment from the borrower is required since the
accumulated interest is added to the principal of the loan through an interest reserve. Increases in market rates of interest may have a
more pronounced effect on construction loans by rapidly depleting the interest reserves prior to completion and/or increasing the end-
purchaser’s borrowing costs, thereby possibly reducing the homeowner’s ability to finance the home upon completion or the overall
demand for the project. Properties under construction are often difficult to sell and typically must be completed in order to be
successfully sold which also complicates the process of managing problem construction loans. This may require us to advance
additional funds and/or contract with another builder to complete construction and assume the market risk of selling the project at a
future market price, which may or may not enable us to fully recover unpaid loan funds and associated construction and liquidation
costs. Loans on land under development or held for future construction also pose additional risk because of the lack of income being
produced by the property and the potential illiquid nature of the collateral. These risks can be significantly impacted by supply and
demand. As a result, this type of lending often involves the disbursement of substantial funds with repayment dependent on the
success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing,
rather than the ability of the borrower or guarantor to independently repay principal and interest.
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Construction loans made by us include those with a sales contract or permanent loan in place for the finished homes and those for
which purchasers for the finished homes may not be identified either during or following the construction period, known as
speculative construction loans. Speculative construction loans to a builder pose a greater potential risk to us than construction loans
to individuals on their personal residences. We attempt to mitigate this risk by actively monitoring the number of unsold homes in
our construction loan portfolio and local housing markets in an attempt to maintain an appropriate balance between home sales and
new loan originations. In addition, the maximum number of speculative construction loans (loans that are not pre-sold) approved for
each builder is based on a combination of factors, including the financial capacity of the builder, the market demand for the finished
product and the ratio of sold to unsold inventory the builder maintains. We have also attempted to diversify the risk associated with
speculative construction lending by doing business with a large number of small and mid-sized builders spread over a relatively large
geographic region representing numerous sub-markets within our service area.
As a result of the increasing real estate values in certain of our market areas, this category of lending has increased. Our investment
in construction and land loans increased by $177.2 million or 14% in 2022. At December 31, 2022, non-performing construction and
land loans totaled $181,000, or 1% of total non-performing loans.
• Commercial and Multifamily Real Estate Loans. At December 31, 2022, commercial and multifamily real estate loans were $4.28
billion, or 42% of our total loan portfolio. These loans typically involve higher principal amounts than other types of loans and some
of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to
one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with
respect to a one- to four-family residential mortgage loan. Repayment of these loans typically is dependent upon income being
generated from the property securing the loan in amounts sufficient to cover operating expenses and debt service, which may be
adversely affected by changes in the economy or local market conditions. In addition, many of our commercial and multifamily real
estate loans are not fully amortizing and contain large balloon payments upon maturity which may require the borrower to either sell
or refinance the underlying property in order to make the balloon payment, thus increasing the risk of default or non-payment. If we
foreclose on a commercial or multifamily real estate loan, our holding period for the collateral typically is longer than for one-to-four
family residential loans because there are fewer potential purchasers of the collateral. At December 31, 2022, non-performing
commercial and multifamily real estate loans totaled $3.7 million, or 16% of total non-performing loans.
• Commercial Business Loans. At December 31, 2022, commercial business loans were $2.23 billion, or 22% of our total loan
portfolio. Our commercial business loans are primarily made based on the cash flow of the borrower and secondarily on the
underlying collateral provided by the borrower. A borrower’s cash flow may prove to be unpredictable, and collateral securing these
loans may fluctuate in value. Most often, this collateral includes accounts receivable, inventory, equipment or real estate. In the case
of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on
the ability of the borrower to collect amounts due from its clients. Other collateral securing loans may depreciate over time, may be
difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. At December 31, 2022, non-
performing commercial business loans totaled $9.9 million, or 43% of total non-performing loans.
• Agricultural Loans. At December 31, 2022, agricultural loans were $295.1 million, or 3% of our total loan portfolio. Repayment of
agricultural loans is dependent upon the successful operation of the business and is subject to many factors outside the control of
either us or the borrowers. These factors include adverse weather conditions that prevent the planting of a crops or limit crop yields
(such as hail, drought and floods), loss of crops or livestock due to disease or other factors, declines in market prices for agricultural
products (both domestically and internationally) and the impact of government regulations (including changes in price supports,
subsidies, tariffs and environmental regulations). In addition, many farms are dependent on a limited number of key individuals
whose injury or death may significantly affect the successful operation of the farm. If the cash flow from a farming operation is
diminished, the borrower’s ability to repay the loan may be impaired. Consequently, agricultural loans may involve a greater degree
of risk than other types of loans, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as
farm equipment (some of which is highly specialized with a limited or no market for resale), or assets such as livestock or crops. In
such cases, any repossessed collateral for a defaulted agricultural operating loan may not provide an adequate source of repayment of
the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation or because the assessed value of the
collateral exceeds the eventual realization value. At December 31, 2022, non-performing agricultural loans totaled $594,000, or 3%
of total non-performing loans.
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• Consumer Loans. At December 31, 2022, consumer loans were $680.9 million, or 7% of our total loan portfolio. Home equity lines
of credit, which represented 83% of our total consumer loan portfolio at December 31, 2022, generally entail greater risk than one- to
four-family residential mortgage loans where we are in the first lien position. For home equity lines secured by a second mortgage, it
is less likely that we will be successful in recovering all of our loan proceeds in the event of default as the value of the property must
be sufficient to cover the repayment of the first mortgage loan, as well as the costs associated with foreclosure, before the balance on
the second mortgage loan is repaid. In the case of consumer loans that are unsecured or secured by rapidly depreciating assets such
as automobiles, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the
borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount which can be recovered on these consumer loans. Loans that we purchased, or indirectly originated, may
also give rise to claims and defenses by a consumer loan borrower against an assignee of such loans such as us, and a borrower may
be able to assert against the assignee claims and defenses that it has against the seller of the underlying collateral. At December 31,
2022, non-performing consumer loans totaled $2.4 million, or 10% of total non-performing loans.
Our business may be adversely affected by credit risk associated with residential property and declining property values.
At December 31, 2022, first-lien one- to four-family residential loans were $1.17 billion or 12% of our total loan portfolio. Our first-lien one-
to four-family residential loans are primarily made based on the repayment ability of the borrower and the collateral securing these loans.
Foreclosure on the loans requires the value of the property to be sufficient to cover the repayment of the loan, as well as the costs associated
with foreclosure.
This type of lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet
their loan payment obligations, making loss levels difficult to predict. A downturn in the economy or the housing market in our market areas
or a rapid increase in interest rates may reduce the value of the real estate collateral securing these types of loans and increase the risk that we
would incur losses if borrowers default on their loans. Residential loans with high combined loan-to-value generally will be more sensitive to
declining properly values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and
severity of losses. In addition, if the borrowers sell their homes, the borrowers may be unable to repay their loans in full from the sale
proceeds. As a result, these loans may experience higher rates of delinquencies, defaults and losses, which will in turn adversely affect our
financial condition and results of operations.
Our allowance for credit losses may not be sufficient to absorb losses in our loan portfolio, which would cause our results of
operations, liquidity and financial condition to be adversely affected.
Lending money is a substantial part of our business and each loan carries a certain risk that it will not be repaid in accordance with its terms or
that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:
• cash flow of the borrower and/or the project being financed;
•
•
•
• changes in economic and industry conditions.
in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral;
the duration of the loan;
the character and creditworthiness of a particular borrower; and
We maintain an allowance for credit losses, which is a reserve established through a provision for expected losses, which we believe is
appropriate to provide for lifetime expected credit losses in our loan portfolio. The amount of this allowance is determined by our
management through periodic reviews and consideration of several factors, including, but not limited to:
•
our collective loss reserve, for loans evaluated on a pool basis which have similar risk characteristics based on our life of loan
historical default and loss experience, certain macroeconomic factors, reasonable and supportable forecasts, regulatory requirements,
management’s expectations of future events and certain qualitative factors; and
• our individual loss reserve, based on our evaluation of individual loans that do not share similar risk characteristics and the present
value of the expected future cash flows or the fair value of the underlying collateral.
The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and requires us
to make significant estimates of current credit risks and future trends, all of which may undergo material changes. If our estimates are
incorrect, the allowance for credit losses may not be sufficient to cover the expected losses in our loan portfolio, resulting in the need for
increases in our allowance for credit losses through the provision for credit losses which is recorded as a charge against income. Management
also recognizes that significant new growth in loan portfolios, new loan products and the refinancing of existing loans can result in portfolios
comprised of unseasoned loans that may not perform in a historical or projected manner and will increase the risk that our allowance may be
insufficient to absorb losses without significant additional provisions.
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Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem
loans and other factors, both within and outside of our control, may require an increase in the allowance for credit losses. If current
conditions in the housing and real estate markets weaken, we expect we will experience increased delinquencies and credit losses.
In addition, bank regulatory agencies periodically review our allowance for credit losses and may require an increase in the provision for
credit losses or the recognition of further loan charge-offs, based on judgments different than those of management. If charge-offs in future
periods exceed the allowance for credit losses, we may need additional provisions to increase the allowance for credit losses. Any increases
in the allowance for credit losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on
our financial condition and results of operations.
Loans originated under the SBA Paycheck Protection Program subject us to forgiveness and guarantee risk.
As of December 31, 2021, we hold and service a portfolio of 94 loans originated under the SBA PPP with a balance of $7.9 million. The
SBA PPP loans are subject to the provisions of the CARES Act and CAA 2021 and to complex and evolving rules and guidance issued by the
SBA and other government agencies. Most of our SBA PPP borrowers have already qualified for forgiveness of their loan obligations,
however, if an SBA PPP borrower fails to qualify for loan forgiveness, we face a heightened risk of holding these loans at unfavorable interest
rates for an extended period of time. We could face additional risks in our administrative capabilities to service our SBA PPP loans, and risk
with respect to the determination of loan forgiveness. In the event of a loss resulting from a default on an SBA PPP loan and a determination
by the SBA that there was a deficiency in the manner in which we originated, funded or serviced an SBA PPP loan, the SBA may deny its
liability under the guaranty, reduce the amount of the guaranty or, if the SBA has already paid under the guaranty, seek recovery of any loss
related to the deficiency from us.
Risks Related to Merger and Acquisition Strategy
We pursue a strategy of supplementing internal growth by acquiring other financial companies or their assets and liabilities that we
believe will help us fulfill our strategic objectives and enhance our earnings. We may be adversely affected by risks associated with
potential acquisitions.
As part of our general growth strategy, we periodically expand our business through acquisitions. Although our business strategy emphasizes
organic expansion, we continue, from time to time in the ordinary course of business, to engage in preliminary discussions with potential
acquisition targets. There can be no assurance that, in the future, we will successfully identify suitable acquisition candidates, complete
acquisitions and successfully integrate acquired operations into our existing operations or expand into new markets. The consummation of
any future acquisitions may dilute shareholder value or may have an adverse effect upon our operating results while the operations of the
acquired business are being integrated into our operations. In addition, once integrated, acquired operations may not achieve levels of
profitability comparable to those achieved by Banner’s existing operations, or otherwise perform as expected. Further, transaction-related
expenses may adversely affect our earnings. These adverse effects on our earnings and results of operations may have a negative impact on
the value of Banner’s stock. Acquiring banks, bank branches or businesses involves risks commonly associated with acquisitions, including:
• We may be exposed to potential asset quality issues or unknown or contingent liabilities of the banks, businesses, assets, and
liabilities we acquire. If these issues or liabilities exceed our estimates, our results of operations and financial condition may be
materially negatively affected;
• Higher than expected deposit attrition;
• Potential diversion of our management’s time and attention;
• Prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions
could not be made in specific markets at prices we considered acceptable and expect that we will experience this situation in the
future;
• The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity into our
company to make the transaction economically successful. This integration process is complicated and time consuming and can also
be disruptive to the clients of the acquired business. If the integration process is not conducted successfully and with minimal
adverse effect on the acquired business and its clients, we may not realize the anticipated economic benefits of particular acquisitions
within the expected time frame, and we may lose clients or employees of the acquired business. We may also experience greater
than anticipated client losses even if the integration process is successful;
• To finance an acquisition, we may borrow funds, thereby increasing our leverage and diminishing our liquidity, or raise additional
capital, which could dilute the interests of our existing shareholders;
• We have completed various acquisitions in the past few years that enhanced our rate of growth. We may not be able to continue to
sustain our past rate of growth or to grow at all in the future; and
• To the extent our costs of an acquisition exceed the fair value of the net assets acquired, the acquisition will generate goodwill. We
are required to assess our goodwill for impairment at least annually, and any goodwill impairment charge could have a material
adverse effect on our results of operations and financial condition.
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The required accounting treatment of loans we acquire through acquisitions could result in higher net interest margins and interest
income in current periods and lower net interest margins and interest income in future periods.
Under GAAP, we are required to record loans acquired through acquisitions at fair value. Estimating the fair value of such loans requires
management to make estimates based on available information and facts and circumstances as of the acquisition date. Actual performance
could differ from management’s initial estimates. If these loans outperform our original fair value estimates, the difference between our
original estimate and the actual performance of the loan (the “discount”) is accreted into net interest income. Thus, our net interest margins
may initially increase due to the discount accretion. Absent changes in interest rates, we expect the yields on our loans to decline as our
acquired loan portfolio pays down or matures and the discount decreases, and we could experience downward pressure on our interest income
to the extent that the runoff on our acquired loan portfolio is not replaced with comparable high-yielding loans. This could result in higher net
interest margins and interest income in current periods and lower net interest rate margins and lower interest income in future periods.
We may incur impairment to goodwill.
In accordance with GAAP, we record assets acquired and liabilities assumed in a business combination at their fair value with the excess of
the purchase consideration over the net assets acquired resulting in the recognition of goodwill. As a result, acquisitions typically result in
recording goodwill. We perform a goodwill evaluation at least annually to test for goodwill impairment. Our test of goodwill for potential
impairment is based on a qualitative assessment by management that takes into consideration macroeconomic conditions, industry and market
conditions, cost or margin factors, financial performance and share price. Our evaluation of the fair value of goodwill involves a substantial
amount of judgment. If our judgment was incorrect, or if events or circumstances change, and an impairment of goodwill was deemed to
exist, we would be required to record a non-cash charge to earnings in our financial statements during the period in which such impairment is
determined to exist. Any such charge could have a material adverse effect on our results of operations.
Risks Related to Market and Interest Rate Changes
Our results of operations, liquidity and cash flows are subject to interest rate risk.
Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are highly sensitive to many factors that are
beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular,
the Federal Reserve. Since March 2022, in response to inflation, the Federal Open Market Committee (FOMC) of the Federal Reserve has
increased the target range for the federal funds rate by 425 basis, including 125 basis points during the fourth calendar quarter of 2022, to a
range of 4.25% to 4.50% as of December 31, 2022. As it seeks to control inflation without creating a recession, the FOMC has indicated
further increases are to be expected during 2023. If the FOMC further increases the targeted federal funds rate, interest rates will likely
continue to rise, which may negatively impact both the housing market, by reducing refinancing activity and new home purchases, and the
U.S. economy.
We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. If we are unable to
manage interest rate risk effectively, our business, financial condition and results of operations could be materially affected.
Changes in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their
current loan obligations or by reducing our margins and profitability. Our net interest margin is the difference between the yield we earn on
our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates—up or down—could adversely
affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to
move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to
expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest
rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest
margin to contract until the yields on interest-earning assets catch up. Changes in the slope of the “yield curve”—or the spread between
short-term and long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning
short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve
flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn
on our assets. Also, interest rate decreases can lead to increased prepayments of loans and mortgage-backed securities as borrowers refinance
their loans to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such
repayment proceeds into lower yielding investments, which would likely decrease our income.
A sustained increase in market interest rates could adversely affect our earnings. As is the case with many banks our emphasis on increasing
core deposits has resulted in an increasing percentage of our deposit balances being comprised of deposit accounts bearing no or a relatively
low rate of interest and having a shorter duration than our assets. At December 31, 2022, we had $531.6 million in certificates of deposit that
mature within one year and $12.90 billion in non-interest-bearing, negotiable order of withdrawal (NOW) checking, savings and money
market accounts. We may incur a higher cost of funds to retain these deposits in a rising interest rate environment. If the interest rates paid
on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest
income, and therefore earnings, could be adversely affected.
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In addition, a substantial amount of our loans have adjustable interest rates. As a result, these loans may experience a higher rate of default in
a rising interest rate environment. Further, a significant portion of our adjustable-rate loans have interest rate floors below which the loan’s
contractual interest rate may not adjust. Approximately 64% of our loan portfolio was comprised of adjustable or floating-rate loans at
December 31, 2022, and approximately $4.40 billion, or 68%, of those loans contained interest rate floors, below which the loans’ contractual
interest rate may not adjust. At December 31, 2022, the weighted average floor interest rate of these loans was 4.15%. At that date,
approximately $1.09 billion, or 25%, of these loans were at their floor interest rate. The inability of our loans to adjust downward can
contribute to increased income in periods of declining interest rates, although this result is subject to the risks that borrowers may refinance
these loans during periods of declining interest rates. Also, when loans are at their floors, there is a further risk that our interest income may
not increase as rapidly as our cost of funds during periods of increasing interest rates which could have a material adverse effect on our results
of operations.
Changes in interest rates also affect the value of our interest-earning assets and in particular our securities portfolio. Generally, the fair value
of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are
reported as a separate component of AOCI, net of tax. Decreases in the fair value of securities available for sale resulting from increases in
interest rates could have an adverse effect on stockholders’ equity.
Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of
changes in interest rates on our results of operations, any substantial, unexpected, prolonged change in market interest rates could have a
material adverse effect on our financial condition, liquidity and results of operations. Also, our interest rate risk modeling techniques and
assumptions may not fully predict or capture the impact of actual interest rate changes on our balance sheet or projected operating results.
Our securities portfolio may be negatively impacted by fluctuations in market value and interest rates.
Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/
or earnings. Fluctuations in market value may be caused by changes in market interest rates, rating agency actions in respect of the securities,
defaults by the issuer or with respect to the underlying securities, lower market prices for securities and limited investor demand. Our
available-for-sale debt securities in an unrealized loss position are evaluated to determine whether the decline in fair value has resulted from
credit losses or other factors. If a credit loss exists, an allowance for credit losses is recorded for the credit loss, resulting in a charge against
earnings. As stated above, changes in interest rates can also have an adverse effect on our financial condition, as our available-for-sale
securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. We increase or decrease our
shareholders’ equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes. There can be no
assurance that the declines in market value will not result in expected credit losses, which would lead to accounting charges that could have a
material adverse effect on our net income and capital levels.
An increase in interest rates, change in the programs offered by secondary market purchasers or our ability to qualify for their
programs may reduce our mortgage banking revenues, which would negatively impact our non-interest income.
Our mortgage banking operations provide a significant portion of our non-interest income. We generate mortgage banking revenues primarily
from gains on the sale of one- to four-family and multifamily mortgage loans. The one- to four-family mortgage loans are sold pursuant to
programs currently offered by Fannie Mae, Freddie Mac, Ginnie Mae and non-Government Sponsored Enterprise (GSE) investors. These
entities account for a substantial portion of the secondary market in residential one- to four-family mortgage loans. Multifamily mortgage
loans are sold primarily to non-GSE investors.
Any future changes in the one- to four-family programs, our eligibility to participate in these programs, the criteria for loans to be accepted or
laws that significantly affect the activity of such entities, or a reduction in the size of the secondary market for multifamily loans could, in
turn, materially adversely affect our results of operations. Mortgage banking is generally considered a volatile source of income because it
depends largely on the level of loan volume which, in turn, depends largely on prevailing market interest rates. In a rising or higher interest
rate environment, our originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold to investors. This
would result in a decrease in mortgage banking revenues and a corresponding decrease in non-interest income. In addition, our results of
operations are affected by the amount of non-interest expense associated with mortgage banking activities, such as salaries and employee
benefits, occupancy, equipment and data processing expense and other operating costs. During periods of reduced loan demand, our results of
operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in loan originations.
In addition, although we sell loans into the secondary market without recourse, we are required to give customary representations and
warranties about the loans to the buyers. If we breach those representations and warranties, the buyers may require us to repurchase the loans
and we may incur a loss on the repurchase.
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Certain hedging strategies that we use to manage investment in mortgage servicing rights, mortgage loans held for sale and interest
rate lock commitments may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rates
and market liquidity.
We use derivative instruments to economically hedge mortgage servicing rights, mortgage loans held for sale and interest rate lock
commitments to offset changes in fair value resulting from changing interest rate environments. Our hedging strategies are susceptible to
prepayment risk, basis risk, market volatility and changes in the shape of the yield curve, among other factors. In addition, hedging strategies
rely on assumptions and projections regarding assets and general market factors. If these assumptions and projections prove to be incorrect or
our hedging strategies do not adequately mitigate the impact of changes in interest rates, we may incur losses that would adversely impact
earnings.
Risks Related to Regulatory, Legal and Compliance
New or changing tax, accounting, and regulatory rules and interpretations could significantly impact strategic initiatives, results of
operations, cash flows, and financial condition.
The financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit
insurance funds and consumers, not to benefit our shareholders. These regulations may sometimes impose significant limitations on
operations. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the
imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s
allowance for credit losses. These bank regulators also have the ability to impose conditions in the approval of merger and acquisition
transactions.
Additionally, actions by regulatory agencies or significant litigation against us may lead to penalties that materially affect us. These
regulations, along with the current tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and
interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and
govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and
may change significantly over time. Any new regulations or legislation, change in existing regulations or oversight, whether a change in
regulatory policy or a change in a regulator’s interpretation of a law or regulation, could have a material impact on our operations, increase
our costs of regulatory compliance and of doing business and/or otherwise adversely affect us and our profitability. Further, changes in
accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent
registered public accounting firm. These changes could materially impact, potentially even retroactively, how we report our financial
condition and results of our operations as could our interpretation of those changes. We cannot predict what restrictions may be imposed upon
us with future legislation.
Climate change and related legislative and regulatory initiatives may materially affect the Company’s business and results of
operations.
The effects of climate change continue to create an alarming level of concern for the state of the global environment. As a result, the global
business community has increased its political and social awareness surrounding the issue, and the United States has entered into international
agreements in an attempt to reduce global temperatures. Further, the U.S. Congress, state legislatures and federal and state regulatory agencies
continue to propose numerous initiatives to supplement the global effort to combat climate change. Similar and even more expansive
initiatives are expected under the current administration, including potentially increasing supervisory expectations with respect to banks’ risk
management practices, accounting for the effects of climate change in stress testing scenarios and systemic risk assessments, revising
expectations for credit portfolio concentrations based on climate-related factors and encouraging investment by banks in climate-related
initiatives and lending to communities disproportionately impacted by the effects of climate change. The lack of empirical data surrounding
the credit and other financial risks posed by climate change render it difficult, or even impossible, to predict how specifically climate change
may impact our financial condition and results of operations; however, the physical effects of climate change may also directly impact us.
Specifically, unpredictable and more frequent weather disasters may adversely impact the real property, and/or the value of the real property,
securing the loans in our portfolios. Additionally, if insurance obtained by our borrowers is insufficient to cover any losses sustained to the
collateral, or if insurance coverage is otherwise unavailable to our borrowers, the collateral securing our loans may be negatively impacted by
climate change, natural disasters and related events, which could impact our financial condition and results of operations. Further, the effects
of climate change may negatively impact regional and local economic activity, which could lead to an adverse effect on our customers and
impact the communities in which we operate. Overall, climate change, its effects and the resulting, unknown impact could have a material
adverse effect on our financial condition and results of operations.
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Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions and
limit our ability to obtain regulatory approval of acquisitions.
The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being
used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity
reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish
procedures for identifying and verifying the identity of clients seeking to open new financial accounts. Failure to comply with these
regulations could result in fines or sanctions and limit our ability to obtain regulatory approval of acquisitions. Recently, several banking
institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures
designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be
effective in preventing violations of these laws and regulations. Failure to maintain and implement adequate programs to combat money
laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material
adverse effect on our business, financial condition, results of operations and growth prospects.
If our enterprise risk management framework is not effective at mitigating risk and loss to us, we could suffer unexpected losses and
our results of operations could be materially adversely affected.
Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which is critical to optimizing
stockholder value. We have established processes and procedures intended to identify, measure, monitor, report, analyze and control the
types of risk to which we are subject. These risks include liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and
compliance risk, and reputational risk, among others. We also maintain a compliance program designed to identify, measure, assess, and
report on our adherence to applicable laws, regulations, policies and procedures. While we assess and improve these programs on an ongoing
basis, there can be no assurance that our risk management or compliance programs, along with other related controls, will effectively mitigate
all risk and limit losses in our business. However, as with any risk management framework, there are inherent limitations to our risk
management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk
management framework proves ineffective, we could suffer unexpected losses and our business financial condition and results of operations
could be materially adversely affected.
Our business and financial results could be impacted materially by adverse results in legal proceedings.
Legal proceedings could result in judgments, significant time and attention from our management, or other adverse effects on our business
and financial results. We establish estimated liabilities for legal claims when payments associated with claims become probable and the
amount of loss can be reasonably estimated. We may still incur losses for a matter even if we have not established an estimated liability. In
addition, the actual cost of resolving a legal claim may be substantially higher than any amounts accrued for that matter. The ultimate
resolution of any legal proceeding, depending on the remedy sought and granted, could materially adversely affect our results of operations
and financial condition.
Risks Related to Cybersecurity, Data and Fraud
We are subject to certain risks in connection with our use of technology.
Our security measures may not be sufficient to mitigate the risk of a cyber-attack. Communications and information systems are essential to
the conduct of our business, as we use such systems to manage our client relationships, our general ledger and virtually all other aspects of
our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer
systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our
computer systems, software, and networks may be vulnerable to breaches, fraudulent or unauthorized access, denial or degradation of service
attacks, misuse, computer viruses, malware or other malicious code and cyber-attacks that could have a security impact. If one or more of
these events occur, this could jeopardize our or our clients’ confidential and other information processed and stored in, and transmitted
through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our
clients or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate
and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or
not fully covered through any insurance maintained by us. We could also suffer significant reputational damage.
Security breaches in our internet banking activities could further expose us to possible liability and damage our reputation. Increases in
criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third party technologies
(including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and
controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions. Any compromise
of our security could deter clients from using our internet banking services that involve the transmission of confidential information. We rely
on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. Although we
have developed and continue to invest in systems and processes that are designed to detect and prevent security breaches and cyber-attacks
and periodically test our security, these precautions may not protect our systems from compromises or breaches of our security measures, and
could result in losses to us or our clients, our loss of business and/or clients, damage to our reputation, the incurrence of additional expenses,
disruption to our business, our inability to grow our online services or other businesses, additional regulatory scrutiny or penalties, or our
exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial
condition and results of operations.
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Our security measures may not protect us from system failures or interruptions. While we have established policies and procedures to prevent
or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be
adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain
third-party providers. While we select third-party vendors carefully, we do not control their actions. If our third-party providers encounter
difficulties including those resulting from breakdowns or other disruptions in communication services provided by a vendor, failure of a
vendor to handle current or higher transaction volumes, cyber-attacks and security breaches or if we otherwise have difficulty in
communicating with them, our ability to adequately process and account for transactions could be affected, and our ability to deliver products
and services to our clients and otherwise conduct business operations could be adversely impacted. Replacing these third-party vendors could
also entail significant delay and expense. Threats to information security also exist in the processing of client information through various
other vendors and their personnel.
We cannot assure you that such breaches, failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by
us or the third parties on which we rely. We may not be insured against all types of losses as a result of third party failures and insurance
coverage may be inadequate to cover all losses resulting from breaches, system failures or other disruptions. If any of our third-party service
providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we
may be required to identify alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable
to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if
at all. Further, the occurrence of any systems failure or interruption could damage our reputation and result in a loss of clients and business,
could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse
effect on our financial condition and results of operations.
We are subject to certain risks in connection with our data management or aggregation.
We are reliant on our ability to manage data and our ability to aggregate data in an accurate and timely manner to ensure effective risk
reporting and management. Our ability to manage data and aggregate data may be limited by the effectiveness of our policies, programs,
processes and practices that govern how data is acquired, validated, stored, protected and processed. While we continuously update our
policies, programs, processes and practices, many of our data management and aggregation processes are manual and subject to human error
or system failure. Failure to manage data effectively and to aggregate data in an accurate and timely manner may limit our ability to manage
current and emerging risks, as well as to manage changing business needs.
Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.
The Bank is susceptible to fraudulent activity that may be committed against us or our clients which may result in financial losses or increased
costs to us or our clients, disclosure or misuse of our information or our client’s information, misappropriation of assets, privacy breaches
against our clients, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic
fraud, wire fraud, phishing, social engineering and other dishonest acts. Nationally, reported incidents of fraud and other financial crimes have
increased. We have also experienced losses due to apparent fraud and other financial crimes. While we have policies and procedures
designed to prevent such losses, there can be no assurance that such losses will not occur.
Risks Related to Our Business and Industry Generally
We will be required to transition from the use of the London Interbank Offered Rate (LIBOR) in the future.
We have certain FHLB advances, loans, investment securities, subordinated debentures and trust preferred securities indexed to LIBOR to
calculate the interest rate. ICE Benchmark Administration, the authorized and regulated administrator of LIBOR, ended publication of the
one-week and two-month USD LIBOR tenors on December 31, 2021 and the remaining USD LIBOR tenors will end publication in June
2023. Financial services regulators and industry groups have collaborated to develop alternate reference rate indices or reference rates. The
transition to a new reference rate requires changes to contracts, risk and pricing models, valuation tools, systems, product design and hedging
strategies. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR (with the exception of
overnight repurchase agreements, which are expected to be based on the Secured Overnight Financing Rate, or SOFR). Uncertainty as to the
nature of such potential changes, alternative reference rates, the elimination or replacement of LIBOR, or other reforms may adversely affect
the value of, and the return on our loans, and our investment securities, and may impact the availability and cost of hedging instruments and
borrowings, including the rates we pay on our subordinated debentures and trust preferred securities. The language in our LIBOR-based
contracts and financial instruments has developed over time and may have various events that trigger when a successor rate to the designated
rate would be selected. If a trigger is satisfied, contracts and financial instruments may give the calculation agent discretion over the
substitute index or indices for the calculation of interest rates to be selected. The implementation of a substitute index or indices for the
calculation of interest rates under our loan agreements with our borrowers or our existing borrowings may result in our incurring significant
expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the substitute index or indices, and may
result in disputes or litigation with clients and creditors over the appropriateness or comparability to LIBOR of the substitute index or indices,
which could have an adverse effect on our results of operations.
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Ineffective liquidity management could adversely affect our financial results and condition.
Effective liquidity management is essential to our business. We require sufficient liquidity to meet client loan requests, client deposit
maturities and withdrawals, payments on our debt obligations as they come due and other cash commitments under both normal operating
conditions and other unpredictable circumstances, including events causing industry or general financial market stress. An inability to raise
funds through deposits, borrowings, the sale of loans or investment securities and other sources could have a substantial negative effect on our
liquidity. We rely on client deposits and at times, borrowings from the FHLB of Des Moines and certain other wholesale funding sources to
fund our operations. Deposit flows and the prepayment of loans and mortgage-related securities are strongly influenced by such external
factors as the direction of interest rates, whether actual or perceived, and the competition for deposits and loans in the markets we serve.
Further, changes to the FHLB of Des Moines’s underwriting guidelines for wholesale borrowings or lending policies may limit or restrict our
ability to borrow, and could therefore have a significant adverse impact on our liquidity. Historically, we have been able to replace maturing
deposits and borrowings if desired; however, we may not be able to replace such funds in the future if, among other things, our financial
condition, the financial condition of the FHLB of Des Moines, or market conditions change. Our access to funding sources in amounts
adequate to finance our activities or on terms which are acceptable could be impaired by factors that affect us specifically or the financial
services industry or economy in general, such as a disruption in the financial markets or negative views and expectations about the prospects
for the financial services industry or deterioration in credit markets. Additional factors that could detrimentally impact our access to liquidity
sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our deposits and loans are
concentrated, negative operating results, or adverse regulatory action against us. Any decline in available funding in amounts adequate to
finance our activities or on terms which are acceptable could adversely impact our ability to originate loans, invest in securities, meet our
expenses, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could, in turn, have a
material adverse effect on our business, financial condition and results of operations.
Additionally, collateralized public funds are bank deposits of state and local municipalities. These deposits are required to be secured by
certain investment grade securities to ensure repayment, which on the one hand tends to reduce our contingent liquidity risk by making these
funds somewhat less credit sensitive, but on the other hand reduces standby liquidity by restricting the potential liquidity of the pledged
collateral. Although these funds historically have been a relatively stable source of funds for us, availability depends on the individual
municipality’s fiscal policies and cash flow needs.
Benefits of Banner Forward and other strategic initiatives may not be realized.
Banner’s ability to compete depends on a number of factors, including, among others, its ability to develop and successfully execute strategic
plans and initiatives. Banner Forward is focused on accelerating growth in commercial banking, deepening relationships with retail clients,
and advancing technology strategies to enhance our digital service channels, while streamlining underwriting and back office processes. We
may not be successful in achieving some or all of these objectives. The expected cost savings and revenue growth from Banner Forward may
not be realized. The costs to implement Banner Forward may be greater than anticipated. Changes in economic conditions beyond our
control, including changes in interest rates, may affect our ability to achieve our objectives. Our inability to execute on or achieve the
anticipated outcomes of Banner Forward may affect how the market perceives us and could impede our growth and profitability.
Development of new products and services may impose additional costs on us and may expose us to increased operational risk.
Our financial performance depends, in part, on our ability to develop and market new and innovative services and to adopt or develop new
technologies that differentiate our products or provide cost efficiencies, while avoiding increased related expenses. This dependency is
exacerbated in the current “FinTech” environment, where financial institutions are investing significantly in evaluating new technologies,
such as “Blockchain,” and developing potentially industry-changing new products, services and industry standards. The introduction of new
products and services can entail significant time and resources, including regulatory approvals. Substantial risks and uncertainties are
associated with the introduction of new products and services, including technical and control requirements that may need to be developed
and implemented, rapid technological change in the industry, our ability to access technical and other information from our clients, the
significant and ongoing investments required to bring new products and services to market in a timely manner at competitive prices and the
preparation of marketing, sales and other materials that fully and accurately describe the product or service and its underlying risks. Our
failure to manage these risks and uncertainties also exposes us to enhanced risk of operational lapses which may result in the recognition of
financial statement liabilities. Regulatory and internal control requirements, capital requirements, competitive alternatives, vendor
relationships and shifting market preferences may also determine if such initiatives can be brought to market in a manner that is timely and
attractive to our clients. Failure to successfully manage these risks in the development and implementation of new products or services could
have a material adverse effect on our business and reputation, as well as on our consolidated results of operations and financial condition.
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We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our
prospects.
Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with
knowledge of, and experience in, the community banking industry where the Bank conducts its business. The process of recruiting personnel
with the combination of skills and attributes required to carry out our strategies is often lengthy. Our success depends to a significant degree
upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel and
upon the continued contributions of our management and personnel. In particular, our success has been and continues to be highly dependent
upon the abilities of key executives, including our President, and certain other employees. We could undergo a difficult transition period if
we were to lose the services of any of these individuals. Our success also depends on the experience of our banking facilities’ managers and
bankers and on their relationships with the clients and communities they serve. In addition, our success has been and continues to be highly
dependent upon the services of our directors, some of whom are at or nearing retirement age, and we may not be able to identify and attract
suitable candidates to replace such directors. The loss of these key persons could negatively impact the affected banking operations.
We rely on other companies to provide key components of our business infrastructure.
We rely on numerous external vendors to provide us with products and services necessary to maintain our day-to-day operations.
Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under
service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements under service level
agreements because of changes in the vendor’s organizational structure, financial condition, support for existing products and services or
strategic focus or for any other reason, could be disruptive to our operations, which in turn could have a material negative impact on our
financial condition and results of operations. We also could be adversely affected to the extent such an agreement is not renewed by the third
party vendor or is renewed on terms less favorable to us. Additionally, the bank regulatory agencies expect financial institutions to be
responsible for all aspects of our vendors’ performance, including aspects which they delegate to third parties. Disruptions or failures in the
physical infrastructure or operating systems that support our business and clients, or cyber-attacks or security breaches of the network system
or devices that our clients use to access our products and services could result in client attrition, regulatory fines, penalties or intervention,
reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially
adversely affect our results of operations or financial condition.
Any inaccurate assumptions in our analytical and forecasting models could cause us to miscalculate our projected revenue or losses,
which could adversely affect us.
We use analytical and forecasting models to estimate the effects of economic conditions on our financial assets and liabilities as well as our
mortgage servicing rights. Those models include assumptions about interest rates and consumer behavior that may be incorrect. If our model
assumptions are incorrect, improperly applied or inadequate, we may record higher than expected losses or lower than expected revenues
which could have a material adverse effect on our business, financial condition and results of operations.
Managing reputational risk is important to attracting and maintaining clients, investors and employees.
Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices,
employee misconduct, failure to deliver minimum standards of service or quality or operational failures due to integration or conversion
challenges as a result of acquisitions we undertake, compliance deficiencies, and questionable or fraudulent activities of our clients. We have
policies and procedures in place to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully
effective. Negative publicity regarding our business, employees, or clients, with or without merit, may result in the loss of clients, investors
and employees, costly litigation, a decline in revenues and increased governmental regulation.
Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our
environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
Companies are facing increasing scrutiny from clients, regulators, investors, and other stakeholders related to their environmental, social and
governance (ESG) practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly
focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions, human rights, and
corporate governance. Increased ESG related compliance costs could result in increases to our overall operational costs. Failure to adapt to or
comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to
do business with certain partners, and our stock price. New government regulations could also result in new or more stringent forms of ESG
oversight and expanding mandatory and voluntary reporting, diligence, and disclosure.
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Risks Related to Holding Our Common Stock
Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is
needed or the cost of that capital may be very high.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. We may at some point,
however, need to raise additional capital to support continued growth or be required by our regulators to increase our capital resources. Any
capital we obtain may result in the dilution of the interests of existing holders of our common stock. Our ability to raise additional capital, if
needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and
performance. Accordingly, we cannot make assurances that we will be able to raise additional capital if needed on terms that are acceptable
to us, or at all. If we cannot raise additional capital when needed, our ability to further expand our operations could be materially impaired
and our financial condition and liquidity could be materially and adversely affected. In addition, if we are unable to raise additional capital
when required by our bank regulators, we may be subject to adverse regulatory action.
We rely on dividends from the Bank for substantially all of our revenue at the holding company level.
We are an entity separate and distinct from our principal subsidiary, the Bank, and derive substantially all of our revenue at the holding
company level in the form of dividends from that subsidiary. Accordingly, we are, and will be, dependent upon dividends from the Bank to
pay the principal of and interest on our indebtedness, to satisfy our other cash needs and to pay dividends on our common stock. The Bank’s
ability to pay dividends is subject to its ability to earn net income and to meet certain regulatory requirements. In the event the Bank is unable
to pay dividends to us, we may not be able to pay dividends on our common stock at the same rate or at all. Also, our right to participate in a
distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.
Our articles of incorporation contain a provision which could limit the voting rights of a holder of our common stock.
Our charter provides that any person or group who acquires beneficial ownership of our common stock in excess of 10% of the outstanding
shares may not vote the excess shares. Accordingly, if you acquire beneficial ownership of more than 10% of the outstanding shares of our
common stock, your voting rights with respect to our common stock will not be commensurate with your economic interest in our company.
Anti-takeover provisions could negatively affect our shareholders.
Provisions in our articles of incorporation and bylaws, the corporate laws of the state of Washington and federal laws and regulations could
delay or prevent a third party from acquiring us, despite the possible benefit to our shareholders, or otherwise negatively affect the market
value of our stock. These provisions, among others, include: restrictions on voting shares of our common stock beneficially owned in excess
of 10% of total shares outstanding; and advance notice requirements for nominations for election to our Board of Directors and for proposing
matters that shareholders may act on at shareholder meetings. In addition, although we are in the process of transitioning from staggered
three-year terms for directors to a declassified board structure in which each director will be elected for a one-year term, this transition is not
complete. The partial staggered terms structure will continue to serve as a relevant anti-takeover provision until the transition to a declassified
board structure. Our articles of incorporation also authorize our Board of Directors to issue preferred or other stock, and preferred or other
stock could be issued as a defensive measure in response to a takeover proposal. In addition, because we are a bank holding company, the
ability of a third party to acquire us is limited by applicable banking laws and regulations. The Bank Holding Company Act requires any
bank holding company to obtain the approval of the Federal Reserve before acquiring 5% or more of any class of our voting securities. Any
entity that is a holder of 25% or more of any class of our voting securities, or in some circumstances a holder of a lesser percentage, is subject
to regulation as a bank holding company under the Bank Holding Company Act. Under the Change in Bank Control Act of 1978, as
amended, any person (or persons acting in concert), other than a bank holding company, is required to notify the Federal Reserve before
acquiring 10% or more of any class of our voting securities.
Item 1B – Unresolved Staff Comments
None.
Item 2 – Properties
Banner maintains its administrative offices and main branch office, which is owned by us, in Walla Walla, Washington. In total, as of
December 31, 2022, we have 137 branch offices located in Washington, Oregon, California, and Idaho. Geographically we have 66 branches
located in Washington, 32 in Oregon, 30 in California and 9 in Idaho. Of these branch locations, approximately two thirds are owned and one
third are leased facilities.
In addition to the branch locations, we also have 18 loan production offices, ten of which are located in
Washington, three in California, two in both Oregon and Idaho, and one in Utah. All but one loan production offices are leased facilities. The
lease terms for our branch and loan production offices are not individually material. Lease expirations range from 3 months to 17
years. Administrative support offices are primarily in Washington, where we have eight facilities, of which we own three and lease
five. Additionally, we have one leased administrative support offices in Idaho and three administrative support offices located in Oregon, two
owned and one leased. In the opinion of management, all properties are adequately covered by insurance, are in a good state of repair and are
appropriately designed for their present and future use.
37
Item 3 – Legal Proceedings
In the normal course of our business, we have various legal proceedings and other contingent matters pending. These proceedings and the
associated legal claims are often contested and the outcome of individual matters is not always predictable. Furthermore, in some matters, it
is difficult to assess potential exposure because the legal proceeding is still in the pretrial stage. These claims and counter claims typically
arise during the course of collection efforts on problem loans or with respect to actions to enforce liens on properties in which we hold a
security interest, although we also are subject to claims related to employment matters. Claims related to employment matters may include,
but are not limited to: claims by our employees of discrimination, harassment, violations of wage and hour requirements, or violations of
other federal, state, or local laws and claims of misconduct or negligence on the part of our employees. Some or all of these claims may lead
to litigation, including class action litigation, and these matters may cause us to incur negative publicity with respect to alleged claims. Our
insurance may not cover all claims that may be asserted against us, and any claims asserted against us, regardless of merit or eventual
outcome, may harm our reputation. Should the ultimate judgments or settlements in any litigation exceed our insurance coverage, they could
have a material adverse effect on our financial condition and results of operation for any period. At December 31, 2022, we had accrued
$14.8 million related to these legal proceedings. The ultimate outcome of these legal proceedings could be more or less than what we have
accrued. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition,
operations or cash flows, except as set forth below.
A class and collective action lawsuit, Bolding et al. v. Banner Bank, US Dist. Ct., WD WA., was filed against Banner Bank on April 17,
2017. The plaintiffs are former and/or current mortgage loan officers of AmericanWest Bank and/or Banner Bank, who allege that the
employer bank failed to pay all required regular and overtime wages that were due pursuant to the Fair Labor Standards Act (FLSA) and
related laws of the state respective to each individual plaintiff. The plaintiffs seek regular and overtime wages, plus certain penalty amounts
and legal fees. On December 15, 2017, the Court granted the plaintiffs’ motion for conditional certification of a class with regard to the
FLSA claims; following notice given to approximately 160 potential class members, 33 persons elected to “opt-in” as plaintiffs in the class.
On October 10, 2018, the Court granted plaintiffs’ motion for certification of a different class of approximately 200 members, with regard to
state law claims. Significant pre-trial motions were filed by both parties, including various motions by Banner Bank seeking to dismiss and/or
limit the class claims. The Court granted in part and denied in part Banner Bank’s motions and has ultimately allowed the case to proceed.
The Court ruled on the last of the pre-trial motions on September 13, 2021, increasing the likelihood of trial or settlement. The parties
participated in a mediation in December 2022; a stay of proceedings is in place until March 6, 2023, to allow the parties’ continuing
settlement efforts. If the parties do not reach a settlement, a trial for this case will be scheduled and will be bifurcated between a liability
phase and a damages phase. If the case goes to trial and the Bank is unsuccessful in defending the claims, damages could exceed the amount
the Company has accrued as a litigation contingency reserve for this case. The Bank has raised substantial defenses to this lawsuit and will
continue to defend this case vigorously. The ultimate outcome is unknown at this time.
Item 4 – Mine Safety Disclosures
Not applicable.
38
PART II
Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Holders
Our voting common stock is principally traded on the NASDAQ Global Select Market under the symbol “BANR.” Shareholders of record as
of December 31, 2022 totaled 1,856 based upon securities position listings furnished to us by our transfer agent. This total does not reflect the
number of persons or entities who hold stock in nominee or “street” name through various brokerage firms.
Dividends
Banner has historically paid cash dividends to its common shareholders. Payments of future cash dividends, if any, will be at the discretion of
our Board of Directors after taking into account various factors, including our business, operating results and financial condition, capital
requirements, current and anticipated cash needs, plans for expansion, any legal or contractual limitation on our ability to pay dividends and
other relevant factors including required payments on our TPS. During 2022, we increased our regular quarterly dividend by 9% to $0.48 per
share. No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in future periods.
Dividends on common stock from Banner depend substantially upon receipt of dividends from the Bank, which is the Company’s
predominant source of income. Management’s projections show an expectation that cash dividends will continue for the foreseeable future.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information about repurchases of common stock by the Company during the quarter ended December 31, 2022:
Period
October 1, 2022 - October 31, 2022
November 1, 2022 - November 30, 2022
December 1, 2022 - December 31, 2022
Total for quarter
Total Number of
Common Shares
Purchased (1)
Average Price
Paid per
Common
Share
72 $
723
58
853 $
59.36
72.11
62.26
70.36
Total Number of
Shares Purchased
as Part of Publicly
Announced Plan
—
—
—
—
Maximum Number of
Remaining Shares that
May be Purchased at
Period End under the
Board Authorization
1,512,510
1,512,510
1,512,510
1,512,510
(1) Includes 853 shares were surrendered by employees to satisfy tax withholding obligations upon the vesting of restricted stock grants in
the fourth quarter of 2022.
On December 22, 2021, the Company announced that its Board of Directors had authorized the repurchase up to 1,712,510 shares of the
Company’s common stock (which was equivalent to 5% of the Company’s common stock). This authorization expired in December of 2022.
There were no shares tendered in connection with option exercises during the years ended December 31, 2022 and 2021, respectively.
Restricted shares canceled to pay withholding taxes totaled 55,228 and 59,730 during the years ended December 31, 2022 and 2021,
respectively.
Equity Compensation Plan Information
The equity compensation plan information presented under subparagraph (d) in Part III, Item 12 of this Form 10-K is incorporated herein by
reference.
39
Performance Graph
The following graph compares the cumulative total shareholder return on Banner common stock with the cumulative total return on the
NASDAQ (U.S. Stock) Index, a peer group of the KBW Regional Bank Index and the S&P 500. Total return assumes the reinvestment of all
dividends.
Total Return Performance
e
u
l
a
V
x
e
d
n
I
250
200
150
100
50
12/31/17
12/31/18
12/31/19
12/31/20
12/31/21
12/31/22
Year Ended
Banner Corporation
KBW Regional Bank Index
NASDAQ Composite
S&P 500
Index
Banner Corporation
NASDAQ Composite
KBW Regional Bank Index
S&P 500
12/31/17
100.00
100.00
100.00
100.00
12/31/18
100.05
97.16
82.51
95.62
Year Ended*
12/31/19
109.07
132.81
102.20
125.72
12/31/20
95.40
192.47
93.33
148.85
12/31/21
128.09
235.15
127.53
191.58
12/31/22
137.28
158.65
118.71
156.88
*Assumes $100 invested in Banner Corporation common stock and each index at the close of business on December 31, 2017 and that all
dividends were reinvested. Information for the graph was provided by Bloomberg LP, New York City, NY.
Item 6 - Reserved
40
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding our financial
condition and results of operations. The information contained in this section should be read in conjunction with the Consolidated Financial
Statements and accompanying Notes to the Consolidated Financial Statements contained in Item IV of this Form 10-K.
Executive Overview
Banner’s successful execution of its super community bank model and strategic initiatives has delivered solid core operating results and
profitability over the last several years. The Company’s longer term strategic initiatives continue to focus on originating high quality assets
and client acquisition, which we believe will continue to generate strong revenue while maintaining the Company’s moderate risk profile.
2022 Financial Highlights
Revenues increased 6%, to $628.4 million, compared to $593.3 million for the prior year.
•
• Net income decreased to $195.4 million, or $5.67 per diluted share, compared to net income of $201.0 million, or $5.76 per diluted
share for the prior year.
• Net interest income increased 11% to $553.2 million, compared to $496.9 million for the prior year.
• Net interest margin, on a tax equivalent basis, was 3.68% compared to 3.39% in the prior year.
• Non-interest income decreased to $75.3 million, compared to $96.4 million for the prior year.
• Non-interest expense decreased to $377.3 million, compared to $380.1 million for the prior year.
•
•
• Net loans receivable increased 12% to $10.01 billion at December 31, 2022, compared to $8.95 billion a year ago.
• Non-performing assets decreased to $23.4 million, or 0.15% of total assets, at December 31, 2022, compared to $23.7 million, or
Return on average assets was 1.18%, compared to 1.24% in the prior year.
Efficiency ratio was 60.04%, compared to 64.06% in the prior year.
0.14% of total assets, a year ago.
The allowance for credit losses - loans was $141.5 million, or 1.39% of total loans receivable, at December 31, 2022, compared to
$132.1 million, or 1.45% of total loans receivable a year ago.
Core deposits (non-interest-bearing and interest-bearing transaction and savings accounts) decreased to $12.90 billion at
December 31, 2022, compared to $13.49 billion a year ago. Core deposits represented 95% of total deposits at December 31, 2022.
Cash dividends paid to shareholders were $1.76 per share, compared to $1.64 for the prior year.
Common shareholders’ equity per share decreased to $42.59 at December 31, 2022, compared to $49.35 a year ago.
•
•
•
•
41
Selected Financial Data: The following condensed consolidated statements of financial condition and operations and selected performance
ratios as of December 31, 2022, 2021, and 2020 and for the years then ended have been derived from our audited consolidated financial
statements.
FINANCIAL CONDITION DATA:
(1)
(In thousands)
Total assets
Cash and securities
Loans receivable, net
Deposits
Borrowings
Total shareholders’ equity
Shares outstanding
OPERATING DATA:
(In thousands)
Interest income
Interest expense
Net interest income
Provision (recapture) for credit losses
Net interest income after provision (recapture) for credit losses
Deposit fees and other service charges
Mortgage banking operations revenue
Net change in valuation of financial instruments carried at fair value
All other non-interest income
Total non-interest income
Salary and employee benefits
All other non-interest expenses
Total non-interest expense
Income before provision for income tax expense
Provision for income tax expense
Net income
PER COMMON SHARE DATA:
Net income:
Basic
Diluted
Diluted adjusted earnings per share
Common shareholders’ equity per share
Common shareholders’ tangible equity per share
Cash dividends
Dividend payout ratio (basic)
Dividend payout ratio (diluted)
(2)
(8)
(2)(8)
OTHER DATA:
Full time equivalent employees
Number of branches
42
2022
2020
December 31
2021
$ 15,833,431 $ 16,804,872 $ 15,031,623
4,003,469
6,321,196
9,703,703
8,952,664
12,567,296
14,326,933
549,960
532,869
1,666,264
1,690,327
35,159
34,253
4,178,375
10,005,259
13,620,059
456,603
1,456,432
34,194
$
$
$
For the Year Ended December 31
2021
520,500 $
23,609
496,891
(33,388)
530,279
39,495
33,948
4,616
18,357
96,416
244,351
135,750
380,101
246,594
45,546
201,048 $
2022
572,569 $
19,390
553,179
10,364
542,815
44,459
10,834
807
19,155
75,255
242,266
135,029
377,295
240,775
45,397
195,378 $
2020
519,146
37,845
481,301
67,875
413,426
34,384
51,083
(656)
13,805
98,616
245,400
124,189
369,589
142,453
26,525
115,928
At or For the Years Ended December 31
2020
2021
2022
$
5.70
5.67
5.69
42.59
31.41
1.76
30.88 %
31.04 %
$
5.81
5.76
5.97
49.35
38.02
1.64
28.23 %
28.47 %
3.29
3.26
3.37
47.39
36.17
1.23
37.39 %
37.73 %
As of December 31
2021
2022
1,931
137
1,891
150
2020
2,061
155
KEY FINANCIAL RATIOS:
Performance Ratios:
(3)
(4)
(5)
Return on average assets
Return on average common equity
Average common equity to average assets
Net interest margin (tax equivalent)
Non-interest income to average assets
Non-interest expense to average assets
Efficiency ratio
Adjusted efficiency ratio
Average interest-earning assets to funding liabilities
Loans to deposits ratio
Selected Financial Ratios:
(6)
(8)
Allowance for credit losses - loans as a percent of total loans at end of period
Net recoveries (charge-offs) as a percent of average outstanding loans during the period
Non-performing assets as a percent of total assets
Allowance for credit losses - loans as a percent of non-performing loans(7)
Common shareholders’ equity to total assets
Common shareholders’ tangible equity to tangible assets
(8)
Consolidated Capital Ratios:
Total capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Tier 1 capital to average leverage assets
Common equity tier I capital to risk-weighted assets
At or For the Years Ended December 31
2020
2021
2022
1.18 %
12.79
9.26
3.68
0.46
2.29
60.04
57.99
104.16
74.92
1.39
0.01
0.15
615.25
9.20
6.95
14.04
12.13
9.45
11.44
1.24 %
12.12
10.26
3.39
0.60
2.35
64.06
60.22
104.18
64.08
1.45
(0.02)
0.14
578.47
10.06
7.93
14.71
12.74
8.76
11.54
0.83 %
7.14
11.63
3.85
0.71
2.65
63.73
60.76
104.61
80.48
1.69
(0.05)
0.24
469.70
11.09
8.69
14.73
12.56
9.50
11.25
Includes securities available-for-sale and held-to-maturity.
(1)
(2) Calculated using shares outstanding.
(3) Net income divided by average assets.
(4) Net income divided by average common equity.
(5) Net interest income as a percent of average interest-earning assets.
(6) Non-interest expenses divided by the total of net interest income and non-interest income.
(7) Non-performing loans consist of nonaccrual and 90 days past due loans still accruing interest.
(8) Represent non-GAAP financial measures.*
*Non-GAAP financial measures: To calculate the adjusted revenue, the diluted adjusted earnings per share and the adjusted efficiency ratio,
we make adjustments to our GAAP revenues and expenses as reported on our Consolidated Statements of Operations, which results in non-
GAAP financial measures. To calculate tangible equity per share and the ratio of tangible common shareholders’ equity to tangible assets, we
make adjustments to our GAAP assets and shareholders’ equity as reported on our Consolidated Statements of Financial Condition, which
results in non-GAAP financial measures. Management has presented non-GAAP financial measures in this discussion and analysis because it
believes that they provide useful and comparative information to assess trends in our core operations and to facilitate the comparison of our
performance with the performance of our peers. However, these non-GAAP financial measures are supplemental and are not a substitute for
any analysis based on GAAP. Where applicable, we have also presented comparable earnings information using GAAP financial measures.
For a reconciliation of these non-GAAP financial measures, see the tables below. Because not all companies use the same calculations, our
presentation may not be comparable to other similarly titled measures as calculated by other companies.
43
The following tables set forth reconciliations of non-GAAP financial measures discussed in this report (dollars in thousands, except share and
per share data):
$
$
$
$
$
$
$
$
$
$
ADJUSTED REVENUE:
Net interest income (GAAP)
Non-interest income (GAAP)
Total revenue (GAAP)
Exclude: Net loss (gain) on sale of securities
Net change in valuation of financial instruments carried at fair value
Gain on sale of branches, including related deposits
Adjusted Revenue (non-GAAP)
ADJUSTED EARNINGS:
Net income (GAAP)
Exclude: Net gain on sale of securities
Net change in valuation of financial instruments carried at fair value
Merger and acquisition-related costs
COVID-19 expenses
Gain on sale of branches, including related deposits
Banner Forward expenses
Loss on extinguishment of debt
Related tax benefit
Total adjusted earnings (non-GAAP)
Diluted earnings per share (GAAP)
Diluted adjusted earnings per share (non-GAAP)
ADJUSTED EFFICIENCY RATIO:
Non-interest expense (GAAP)
Exclude: Merger and acquisition-related costs
COVID-19 expenses
Banner Forward expenses
CDI amortization
State/municipal tax expense
REO operations
Loss on extinguishment of debt
Adjusted non-interest expense (non-GAAP)
Net interest income (GAAP)
Non-interest income (GAAP)
Total revenue (GAAP)
Exclude: Net loss (gain) on sale of securities
Net change in valuation of financial instruments carried at fair value
Gain on sale of branches, including related deposits
Adjusted revenue (non-GAAP)
Efficiency ratio (GAAP)
Adjusted efficiency ratio (non-GAAP)
44
For the Years Ended December 31
2021
2020
2022
553,179 $
75,255
628,434
3,248
(807)
(7,804)
623,071 $
195,378 $
3,248
(807)
—
—
(7,804)
5,293
793
(174)
195,927 $
5.67 $
5.69 $
496,891 $
96,416
593,307
(482)
(4,616)
—
588,209 $
201,048 $
(482)
(4,616)
660
436
—
11,604
2,284
(2,373)
208,561 $
5.76 $
5.97 $
481,301
98,616
579,917
(1,012)
656
—
579,561
115,928
(1,012)
656
2,062
3,502
—
—
—
(1,239)
119,897
3.26
3.37
2022
377,295
—
—
(5,293)
(5,279)
(4,693)
104
(793)
361,341
553,179
75,255
628,434
3,248
(807)
(7,804)
623,071
$
December 31
2021
380,101
(660)
(436)
(11,604)
(6,571)
(4,343)
22
(2,284)
354,225
$
$
$
496,891
96,416
593,307
(482)
(4,616)
—
588,209
2020
369,589
(2,062)
(3,502)
—
(7,732)
(4,355)
190
—
352,128
481,301
98,616
579,917
(1,012)
656
—
579,561
$
$
$
$
60.04 %
57.99 %
64.06 %
60.22 %
63.73 %
60.76 %
We calculate tangible common equity by excluding goodwill and other intangible assets from shareholders’ equity. We calculate tangible
assets by excluding the balance of goodwill and other intangible assets from total assets. We believe that this is consistent with the treatment
by our bank regulatory agencies, which exclude goodwill and other intangible assets from the calculation of risk-based capital ratios.
Management believes that this non-GAAP financial measure provides information to investors that is useful in understanding the basis of our
capital position (dollars in thousands).
Shareholders’ equity (GAAP)
Exclude goodwill and other intangible assets, net
Common shareholders’ tangible equity (non-GAAP)
Total assets (GAAP)
Exclude goodwill and other intangible assets, net
Total tangible assets (non-GAAP)
Common shareholders’ equity to total assets (GAAP)
Common shareholders’ tangible equity to tangible assets (non-GAAP)
Common shares outstanding
Common shareholders’ equity (book value) per share (GAAP)
Common shareholders’ tangible equity (tangible book value) per share (non-GAAP)
Critical Accounting Estimates
2022
$ 1,456,432
382,561
$ 1,073,871
$ 15,833,431
382,561
$ 15,450,870
December 31
2021
$ 1,690,327
387,976
$ 1,302,351
$ 16,804,872
387,976
$ 16,416,896
2020
$ 1,666,264
394,547
$ 1,271,717
$ 15,031,623
394,547
$ 14,637,076
9.20 %
6.95 %
10.06 %
7.93 %
11.09 %
8.69 %
34,194,018
42.59
31.41
$
$
34,252,632
49.35
38.02
$
$
35,159,200
47.39
36.17
$
$
The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgements that
affect amounts reported in the consolidated financial statements. These estimates, assumptions, and judgments are based on information
available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates,
assumptions, and judgments reflected in the financial statements. Management believes the following estimates require difficult, subjective
or complex judgments and, therefore, management considers the following to be critical accounting estimates.
Allowance for Credit Losses: The allowance for credit losses reflects management's evaluation of our loans and their estimated loss potential,
as well as the risk inherent in various components of the portfolio. There is significant judgment and assumptions applied in estimating the
allowance for credit losses. These judgements, assumptions and estimates are susceptible to significant changes based on the current
environment. Among the material estimates required to establish the allowance for credit losses are a reasonable and supportable forecast; a
reasonable and supportable forecast period and the reversion period; value of collateral; strength of guarantors; the amount and timing of
future cash flows for loans individually evaluated; and determination of the qualitative loss factors.
Management estimates the allowance for credit losses using relevant information, from internal and external sources, relating to past events,
current conditions, and reasonable and supportable forecasts. The allowance for credit losses is maintained at a level sufficient to provide for
expected credit losses over the life of the asset based on evaluating historical credit loss experience and making adjustments to historical loss
information for differences in the specific risk characteristics in the current portfolio. These factors include, among others, changes in the size
and composition of the portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic
conditions.
Management considers various economic scenarios and forecasts to arrive at the estimate that most reflects management’s expectations of
future conditions. The selection of a more optimistic or pessimistic economic forecast would result in a lower or higher allowance for credit
losses. The use of a protracted slump economic forecast would have increased the allowance for credit losses - loans by approximately 28%
as of December 31, 2022, where the use of a stronger near-term growth economic forecast would result in a negligible decrease in the
allowance for credit losses - loans as of December 31, 2022.
Management uses a scale to assign qualitative and environmental (QE) factor adjustments based on the level of estimated impact which
requires a significant amount of judgment. Some QE factors impact all loan segments equally while others may impact some loan segments
more or less than others. If management’s judgment were different for a QE factor that impacts all loan segments equally, a five basis-point
change in this QE factor would increase or decrease the allowance for credit losses by 3.7% as of December 31, 2022.
45
Fair Value Accounting and Measurement: We use fair value measurements to record fair value adjustments to certain financial assets and
liabilities. A hierarchical disclosure framework associated with the level of pricing observability is utilized in measuring financial
instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level
of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from
actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair
value. Conversely, financial instruments rarely traded or not quoted will generally have little or no pricing observability and a higher degree
of judgment utilized in measuring fair value. Determining the fair value of financial instruments with unobservable inputs requires a
significant amount of judgment. This includes the discount rate used to fair value our trust preferred securities and junior subordinated
debentures. A 25 basis-point increase or decrease in the discount rate used to calculate the fair value of our trust preferred securities would
result in a $643,000 decrease or increase in the reported fair value as of December 31, 2022, with an offsetting adjustment to our non-interest
income. A 25 basis-point increase or decrease in the discount rate used to calculate the fair value of our junior subordinated debentures would
result in a $1.6 million decrease or increase in the reported fair value as of December 31, 2022, with an offsetting adjustment to our
accumulated other comprehensive income.
Goodwill: An assessment of qualitative factors is completed to determine if it is more likely than not that the fair value of a reporting unit is
less than its carrying amount. The qualitative assessment involves judgment by management on determining whether there have been any
triggering events that have occurred which would indicate potential impairment. If the qualitative analysis concludes that further analysis is
required, then a quantitative impairment test would be completed. Various valuation methodologies are considered when estimating the
reporting unit’s fair value. The specific factors used in these various valuation methodologies that require judgment include the selection of
comparable market transactions, discount rates, earnings capitalization rates and the future projected earnings of the reporting unit. Changes
in these assumptions could result in changes to the estimated fair value of the reporting unit. The Company completed an assessment of
qualitative factors as of December 31, 2022, and concluded that no further analysis was required as it is more likely than not that the fair value
of the Bank, the reporting unit, exceeds the carrying value.
Income Taxes and Deferred Taxes: The Company determines its deferred tax assets and liabilities based on the enacted tax rates that are
expected to be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities
are expected to be reported in the Company’s income tax returns. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date. A 1% change in tax rates would result in a $7.3 million increase or decrease in our net
deferred tax asset as of December 31, 2022. Changes in the estimate of accrued taxes occur periodically due to changes in tax rates,
interpretations of tax laws, the status of examinations by the tax authorities and newly enacted statutory, judicial and regulatory guidance that
could impact the relative merits of tax positions. These changes, when they occur, impact accrued taxes and can materially affect our
operating results. The evaluation pertaining to the tax expense and related deferred tax asset and liability balances involves a high degree of
judgment and subjectivity around the measurement and resolution of these matters. This includes an evaluation of our ability to use our net
operating loss carryforwards. The ultimate realization of the deferred tax assets is dependent upon the existence, or generation, of taxable
income in the periods when those temporary differences and net operating loss and credit carryforwards are deductible.
Legal Contingencies: In the normal course of our business, we have various legal proceedings and other contingent matters pending. We
determine whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be
reasonably estimated. We assess our potential liability by analyzing our litigation and regulatory matters using available information. We
develop our views on estimated losses in consultation with outside counsel handling our defense in these matters, which involves an analysis
of potential results, assuming a combination of litigation and settlement strategies. The estimated losses often involve a level of subjectivity
and usually are a range of reasonable losses and not an exact number, in those situations we accrue the best estimate within the range or the
low end of the range if no estimate within the range is better than another.
Comparison of Financial Condition at December 31, 2022 and 2021
General. Total assets decreased to $15.83 billion at December 31, 2022, compared to $16.80 billion at December 31, 2021. The decrease in
assets in 2022 was largely the result of a decrease in cash held and interest-bearing deposits, partially offset by loan growth.
Total loans receivable (gross loans less deferred fees and discounts and excluding loans held for sale) increased $1.06 billion, or 12%, to
$10.15 billion at December 31, 2022, from $9.08 billion at December 31, 2021. The increase in total loans receivable primarily reflects
increased one-to-four family residential, multifamily real estate, commercial business, construction, land and land development, and
consumer loan balances, partially offset by decreased commercial real estate loan balances. Excluding SBA PPP loans, total loans receivable
increased $1.19 billion during the year ended December 31, 2022.
Loans held for sale decreased to $56.9 million at December 31, 2022, compared to $96.5 million at December 31, 2021, principally as a result
of a decrease in one- to four-family held for sale loan originations and the transfer of $54.0 million of multifamily held for sale loans to held
for investment during the fourth quarter of 2022. Loans held for sale at December 31, 2022 included $49.5 million of multifamily loans and
$7.4 million of one- to four-family loans, compared to $49.9 million of multifamily loans and $46.6 million of one- to four-family loans at
December 31, 2021.
46
The aggregate of securities and interest-bearing deposits decreased $1.98 billion, or 32%, to $4.28 billion at December 31, 2022, compared to
$6.26 billion a year earlier, primarily due to a decrease in interest-bearing deposits. Securities decreased to $3.94 billion at December 31,
2022, from $4.19 billion at December 31, 2021, as the fair value of securities available-for-sale declined as a result of an increase in interest
rates during 2022. Fair value adjustments for securities designated as available-for-sale reflected a decrease of $418.8 million for the year
ended December 31, 2022, which was included net of the associated tax benefit as a component of other comprehensive income, and largely
occurred as a result of increases in market interest rates during 2022. Securities which are designated as held-to-maturity increased by $596.7
million from the prior year-end balance. This increase was primarily due to the transfer of $462.2 million of securities from available for sale
to held to maturity during the first quarter of 2022 to limit the impact that potential future interest rates changes would have on AOCI. The
average effective duration of our securities portfolio was approximately 6.5 years at December 31, 2022, compared to 4.6 years at
December 31, 2021.
Deposits decreased $706.9 million, or 5%, to $13.62 billion at December 31, 2022, from $14.33 billion at December 31, 2021. The decrease
in deposits reflects the sale of four branches, which included the transfer of $178.2 million of related deposits, as well as an overall decline in
market liquidity. Core deposits were 95% of total deposits at December 31, 2022, compared to 94% of total deposits one year earlier. Non-
interest-bearing deposits decreased by $208.2 million, or 3%, to $6.18 billion from $6.39 billion at December 31, 2021; interest-bearing
transaction and savings accounts decreased by $383.6 million or 5%, to $6.72 billion at December 31, 2022 from $7.10 billion at
December 31, 2021; and certificates of deposit decreased $115.1 million, or 14%, to $723.5 million at December 31, 2022 from $838.6
million at December 31, 2021.
We had $50.0 million of FHLB advances at both December 31, 2022 and December 31, 2021, as core deposits were a sufficient source of
funding. Other borrowings, consisting of retail repurchase agreements primarily related to client cash management accounts, decreased $31.7
million to $232.8 million at December 31, 2022, compared to $264.5 million at December 31, 2021. Junior subordinated debentures totaled
$74.9 million at December 31, 2022 compared to $119.8 million at December 31, 2021, as we redeemed $50.5 million of junior subordinated
debentures during the first quarter of 2022. Subordinated notes, net of issuance costs, were $98.9 million at December 31, 2022 compared to
$98.6 million at December 31, 2021.
Total shareholders’ equity decreased $233.9 million, to $1.46 billion at December 31, 2022, compared to $1.69 billion at December 31, 2021.
The decrease in shareholders’ equity is primarily due to the $363.0 million decrease in AOCI, primarily due to an increase in the unrealized
loss and related decrease in the fair value of securities available-for-sale, net of tax, as a result of an increase in interest rates during 2022, the
accrual of $60.9 million of cash dividends to common shareholders, and the repurchase of 200,000 shares of common stock at a total cost of
$11.0 million, partially offset by the $195.4 million of year-to-date net income. Common shareholder’s equity to total assets was 9.20% and
10.06% at December 31, 2022 and 2021, respectively. Tangible common shareholders’ equity (a non-GAAP financial measure), which
excludes goodwill and other intangible assets was $1.07 billion, or 6.95% of tangible assets at December 31, 2022, compared to $1.30 billion,
or 7.93% at December 31, 2021. The decrease in tangible common shareholders’ equity as a percentage of tangible assets was primarily due
to the previously mentioned decrease in AOCI. The Company’s book value per share was $42.59 at December 31, 2022, compared to $49.35
per share a year ago, and its tangible book value per share (a non-GAAP financial measure) was $31.41 at December 31, 2022, compared to
$38.02 per share a year ago. See, “Executive Overview” above for a reconciliation of these non-GAAP financial measures.
Investments. At December 31, 2022, our consolidated investment securities portfolio totaled $3.94 billion and consisted principally of
mortgage-backed and mortgage-related securities and municipal bonds and to a lesser extent U.S. Government and agency obligations,
corporate debt obligations, and asset-backed securities. Our investment levels may be increased or decreased depending upon management’s
projections as to the demand for funds to be used in our loan origination, deposit and other activities and upon yields available on investment
alternatives. During the year ended December 31, 2022, our aggregate investment in securities decreased $251.6 million primarily due to a
decrease in the fair value of securities available-for-sale as a result of an increase in interest rates during 2022. Holdings of mortgage-backed
securities decreased $151.7 million and U.S. Government and agency obligations decreased $146.2 million, while municipal bonds increased
$35.2 million, corporate debt obligations increased $8.1 million and asset-backed securities increased $5.1 million.
U.S. Government and Agency Obligations: Our portfolio of U.S. Government and agency obligations had a carrying value of $55.4 million
(with an amortized cost of $56.7 million) at December 31, 2022, a weighted average contractual maturity of 10.3 years and a weighted
average coupon rate of 4.84%. Many of the U.S. Government and agency obligations we own include call features which allow the issuing
agency the right to call the securities at various dates prior to the final maturity.
Mortgage-Backed Obligations: At December 31, 2022, our mortgage-backed and mortgage-related securities had a carrying value of $2.75
billion ($3.12 billion at amortized cost, with a net fair value adjustment of $365.8 million). The weighted average coupon rate of these
securities was 2.62% and the weighted average contractual maturity was 24.9 years, although we receive principal payments on these
securities each month resulting in a much shorter expected average life. As of December 31, 2022, 98% of the mortgage-backed and
mortgage-related securities pay interest at a fixed rate.
47
Municipal Bonds: The carrying value of our tax-exempt bonds at December 31, 2022 was $653.1 million ($678.9 million at amortized cost),
comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and, to a lesser extent, revenue bonds (i.e., backed by
revenues from the specific project being financed) issued by cities and counties and various housing authorities, and hospital, school, water
and sanitation districts. We also had taxable bonds in our municipal bond portfolio, which at December 31, 2022 had a carrying value of
$111.2 million ($125.6 million at amortized cost). Many of our qualifying municipal bonds are not rated by a nationally recognized credit
rating agency due to the smaller size of the total issuance and a portion of these bonds have been acquired through direct private placement by
the issuers. We have not experienced any defaults or payment deferrals on our current portfolio of municipal bonds. Our combined
municipal bond portfolio is geographically diverse, with the majority within the states of Washington, Oregon, Texas and California. At
December 31, 2022, our municipal bond portfolio, including taxable and tax-exempt, had a weighted average maturity of approximately 20.5
years and a weighted average coupon rate of 3.44%.
Corporate Bonds: Our corporate bond portfolio had a carrying value of $153.5 million ($163.5 million at amortized cost, with a net fair value
adjustment of $10.0 million) at December 31, 2022. At December 31, 2022, the portfolio had a weighted average maturity of 9.9 years and a
weighted average coupon rate of 4.30%.
Asset-Backed Securities: At December 31, 2022, our asset-backed securities portfolio had a carrying value of $211.5 million (with an
amortized cost of $222.5 million), and was comprised of collateralized loan obligations. The weighted average coupon rate of these securities
was 5.93% and the weighted average contractual maturity was 12.9 years. At December 31, 2022, 100% of these securities had adjustable
interest rates tied to three-month LIBOR.
The following tables set forth certain information regarding carrying values and percentage of total carrying values of our portfolio of
securities—trading and securities—available-for-sale, both carried at estimated fair market value, and securities—held-to-maturity, carried at
amortized cost as of December 31, 2022, 2021 and 2020 (dollars in thousands):
Table 1: Securities
Trading
Corporate bonds
Total securities—trading
Available-for-Sale
U.S. Government and agency obligations
Municipal bonds
Corporate bonds
Mortgage-backed or related securities
Asset-backed securities
Total securities—available-for-sale
Held-to-Maturity
U.S. Government and agency obligations
Municipal bonds
Corporate bonds
Mortgage-backed or related securities
Total securities—held-to-maturity
Estimated market value
2022
December 31
2021
2020
Carrying
Value
Percent of
Total
Carrying
Value
Percent of
Total
Carrying
Value
Percent of
Total
$
$
28,694
28,694
100.0 % $
100.0 % $
26,981
26,981
100.0 % $
100.0 % $
24,980
24,980
100.0 %
100.0 %
$
55,108
261,209
121,853
2,139,336
211,525
$ 2,789,031
$
312
503,117
2,961
611,577
$ 1,117,967
942,180
$
2.0 % $
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308,612
117,347
2,805,268
206,434
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5.5 % $
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303,518
221,769
1,646,152
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48
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49
Loans and Lending. Loans are our most significant and generally highest yielding earning assets. We attempt to maintain a portfolio of
loans to total deposits ratio at a level designed to enhance our revenues, while adhering to sound underwriting practices and appropriate
diversification guidelines in order to maintain a moderate risk profile. Our loan to deposit ratio typically ranges from 90% to 95%. Our loan
to deposit ratio at December 31, 2022 was 75%. During the most recent quarters our loan to deposit ratio has begun to trend upward as the
unprecedented level of market liquidity begins to contract. We offer a wide range of loan products to meet the demands of our clients. Our
lending activities are primarily directed toward the origination of real estate and commercial loans. Total loans receivable increased $1.06
billion, or 12%, to $10.15 billion at December 31, 2022, from $9.08 billion at December 31, 2021. The increase in total loans receivable for
the year ended December 31, 2022 primarily reflects increased one-to-four family residential, multifamily real estate, commercial business,
construction, land and land development, and consumer loan balances, partially offset by decreased commercial real estate loan balances.
While we originate a variety of loans, our ability to originate each type of loan is dependent upon the relative client demand and competition
in each market we serve. We continue to implement strategies designed to capture more market share and achieve increases in targeted loans.
New loan originations and portfolio balances will continue to be significantly affected by economic activity and changes in interest rates.
The following table shows loan originations (excluding loans held for sale) activity for the years ended December 31, 2022, 2021, and 2020
(in thousands):
Table 3: Loan Originations
Commercial real estate
Multifamily real estate
Construction and land
Commercial business:
Commercial business
SBA PPP
Agricultural business
One-to four- family residential
Consumer
Total loan originations (excluding loans held for sale)
Years Ended
Dec 31, 2021
Dec 31, 2022
$
418,635 $
37,612
1,935,476
565,809 $
110,640
1,975,664
Dec 31, 2020
356,361
27,119
1,588,311
1,034,950
—
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358,976
545,254
4,420,558 $
731,315
485,077
61,997
206,662
465,213
4,602,377 $
628,981
1,176,018
76,096
116,713
423,526
4,393,125
$
One- to Four-Family Residential Real Estate Lending: At December 31, 2022, $1.17 billion, or 12% of our loan portfolio, consisted of
permanent loans on one- to four-family residences. We are active originators of one- to four-family residential loans in most communities
where we have established offices in Washington, Oregon, California and Idaho. Originations of portfolio one- to four-family residential
loans have recently been relatively strong, despite increases in interest rates during the current year. Our balance of loans for one- to four-
family residences increased by $515.6 million in 2022, compared to the prior year. The increase in one-to-four family real estate loans during
2022 was primarily the result of one- to four-family construction loans converting to one- to four-family residential portfolio loans and a
higher percentage of new production originated as held for investment during the year due to the higher interest rate environment.
Construction and Land Lending: Our construction loan originations have been relatively strong in recent years as builders have expanded
production and experienced strong home sales in many markets where we operate. At December 31, 2022, construction, land and land
development loans totaled $1.49 billion, or 15% of total loans, compared to $1.31 billion, or 14%, at December 31, 2021. One-to four-family
construction loans increased by $78.6 million in 2022, as builders have expanded production and experienced strong home sales during the
year. During the year ended December 31, 2022, land and land development loans (both residential and commercial) increased by $15.0
million, primarily reflecting increased residential land and land development loans also due to the strong housing market.
Commercial and Multifamily Real Estate Lending: We also originate loans secured by commercial and multifamily real estate. Commercial
and multifamily real estate loans originated by us include both fixed- and adjustable-rate loans with intermediate terms of generally five to ten
years. Our commercial real estate portfolio consists of loans on a variety of property types with no significant concentrations by property
type, borrowers or locations. At December 31, 2022, our loan portfolio included $3.64 billion of commercial real estate loans, or 36% of the
total loan portfolio, and $645.1 million of multifamily real estate loans, or 6% of the total loan portfolio, compared to $3.79 billion, or 42%,
and $530.9 million, or 6%, at December 31, 2021, respectively.
Commercial Business Lending: Our commercial business lending is directed toward meeting the credit and related deposit needs of various
small- to medium-sized business and agribusiness borrowers operating in our primary market areas. In addition to providing earning assets,
this type of lending has helped increase our deposit base. At December 31, 2022, commercial business loans totaled $1.28 billion, or 13% of
total loans, compared to $1.17 billion, or 13%, at December 31, 2021. SBA PPP loans decreased 94% to $7.9 million at December 31, 2022,
compared to $133.9 million at December 31, 2021. Our commercial business lending, to a lesser extent, includes participation in certain
syndicated loans, including shared national credits that totaled $234.1 million at December 31, 2022.
50
Agricultural Lending: Agriculture is a major industry in many Washington, Oregon, California and Idaho locations in our service
area. While agricultural loans are not a large part of our portfolio, we routinely make agricultural loans to borrowers with a strong capital
base, sufficient management depth, proven ability to operate through agricultural cycles, reliable cash flows and adequate financial
reporting. Payments on agricultural loans depend, to a large degree, on the results of operation of the related farm entity. The repayment is
also subject to other economic and weather conditions as well as market prices for agricultural products, which can be highly volatile at
times. At December 31, 2022, agricultural loans totaled $295.1 million, or 3% of the loan portfolio, compared to $280.6 million, or 3%, at
December 31, 2021.
Consumer and Other Lending: Consumer lending has traditionally been a modest part of our business with loans made primarily to
accommodate our existing client base. At December 31, 2022, our consumer loans increased $125.0 million to $680.9 million, or 7% of our
loan portfolio, compared to $555.9 million, or 6%, at December 31, 2021. The increase from December 31, 2021 was primarily due to a
home equity loan marketing campaign during the second and third quarters of 2022. As of December 31, 2022, 83% of our consumer loans
were secured by one- to four-family residences, including home equity lines of credit. Credit card balances totaled $42.9 million at
December 31, 2022 compared to $37.8 million a year earlier.
Loan Servicing Portfolio: At December 31, 2022, we were servicing $3.01 billion of loans for others and held $11.4 million in escrow for our
portfolio of loans serviced for others. The loan servicing portfolio at December 31, 2022 was comprised of $1.35 billion of Freddie Mac
residential mortgage loans, $1.09 billion of Fannie Mae residential mortgage loans, $328.5 million of Oregon Housing residential mortgage
loans, $69.9 million of SBA loans and $171.4 million of other loans serviced for a variety of investors. The portfolio included loans secured
by property located primarily in the states of Washington, Oregon, Idaho and California. For the years ended December 31, 2022 and 2021,
we recognized $7.5 million and $7.7 million of loan servicing income in our results of operations, respectively. For the years ended
December 31, 2022 and 2021, we recognized $4.2 million and $6.6 million of amortization for MSRs and SBA servicing rights, respectively.
51
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The following table sets forth the Company’s loans by geographic concentration at December 31, 2022, 2021 and 2020 (dollars in thousands):
Table 5: Loans by Geographic Concentration
Washington
California
Oregon
Idaho
Utah
Other
Total
Percent
$
December 31, 2022
Amount
4,777,546
2,484,980
1,826,743
565,586
75,967
415,902
$ 10,146,724
47.1 % $
24.5
18.0
5.6
0.7
4.1
100.0 % $
December 31, 2021
December 31, 2020
Amount
4,264,590
2,138,340
1,652,364
525,141
74,913
429,415
9,084,763
Percent
47.0 % $
23.5
18.2
5.8
0.8
4.7
100.0 % $
Amount
4,647,553
2,279,749
1,792,156
537,996
80,704
532,824
9,870,982
Percent
47.0 %
23.1
18.2
5.5
0.8
5.4
100.0 %
The following table sets forth certain information at December 31, 2022 regarding the dollar amount of loans maturing in our portfolio based
on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. Demand loans, loans having no
stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances are net of
unamortized premiums and discounts and exclude loans held for sale (in thousands):
Table 6: Loans by Maturity
Commercial real estate:
Owner-occupied
Investment properties
Small balance CRE
Total Commercial real estate
Multifamily real estate
Construction, land and land development:
Commercial construction
Multifamily construction
One- to four-family construction
Land and land development
Total Construction, land and land development
Commercial business:
Commercial business
SBA PPP
Small business scored
Total Commercial business
Agricultural business, including secured by farmland:
Agricultural business, including secured by farmland
SBA PPP
Total Agricultural business, including secured by
farmland
One- to four-family residential
Consumer:
Consumer—home equity revolving lines of credit
Consumer—other
Total Consumer
Total loans
Maturing in
One Year or
Less
Maturing
After One to
Five Years
Maturing
After Five to
Fifteen Years
Maturing
After Fifteen
Years
$
61,124 $
90,292
55,253
206,669
13,865
103,467
143,078
608,249
134,510
989,304
393,951
—
63,168
457,119
84,445
—
84,445
9,012
113,952
315,592
318,981
748,525
66,797
13,547
149,765
38,858
62,278
264,448
340,383
7,594
218,041
566,018
72,289
334
72,623
10,347
$
$
637,574
929,061
777,653
2,344,288
321,067
62,069
15,350
—
127,070
204,489
383,118
—
309,395
692,513
136,200
—
136,200
48,159
$
Total
845,320
1,589,975
1,200,251
3,635,546
645,071
184,876
325,816
647,329
328,475
1,486,496
1,275,813
7,594
947,092
2,230,499
294,743
334
32,670
255,030
48,364
336,064
243,342
5,793
17,623
222
4,617
28,255
158,361
—
356,488
514,849
1,809
—
1,809
1,105,594
295,077
1,173,112
3,328
31,594
34,922
566,291
114,632
680,923
$ 1,795,336 $ 1,755,329 $ 3,789,327 $ 2,806,732 $ 10,146,724
546,180
30,639
576,819
6,622
35,989
42,611
10,161
16,410
26,571
Contractual maturities of loans do not necessarily reflect the actual life of such assets. The average life of loans typically is substantially less
than their contractual maturities because of principal repayments and prepayments. In addition, due-on-sale clauses on certain mortgage loans
generally give us the right to declare loans immediately due and payable in the event that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends to increase however when current mortgage loan market rates
are substantially higher than rates on existing mortgage loans and, conversely, decreases when rates on existing mortgage loans are
substantially higher than current mortgage loan market rates.
53
The following table sets forth the dollar amount of all loans maturing after December 31, 2023 which have fixed interest rates and floating or
adjustable interest rates (in thousands):
Table 7: Loans Maturing after One Year
Commercial real estate:
Owner-occupied
Investment properties
Small balance CRE
Total Commercial real estate
Multifamily real estate
Construction, land and land development:
Commercial construction
Multifamily construction
One- to four-family construction
Land and land development
Total Construction, land and land development
Commercial business:
Commercial business
SBA PPP
Small business scored
Total Commercial business
Agricultural business, including secured by farmland:
Agricultural business, including secured by farmland
SBA PPP
Total Agricultural business, including secured by farmland
One- to four-family residential
Consumer:
Consumer—home equity revolving lines of credit
Consumer—other
Total Consumer
Total loans maturing after one year
Fixed Rates
Floating or
Adjustable Rates
Total
$
269,471 $
450,189
250,146
969,806
362,820
514,725 $
1,049,494
894,852
2,459,071
268,386
10,780
90,834
766
18,267
120,647
569,452
7,594
201,336
778,382
74,415
334
74,749
945,943
70,629
91,904
38,314
175,698
376,545
312,410
—
682,588
994,998
135,883
—
135,883
218,157
2,971
78,521
81,492
3,333,839 $
559,992
4,517
564,509
5,017,549 $
$
784,196
1,499,683
1,144,998
3,428,877
631,206
81,409
182,738
39,080
193,965
497,192
881,862
7,594
883,924
1,773,380
210,298
334
210,632
1,164,100
562,963
83,038
646,001
8,351,388
Deposits. We compete with other financial institutions and financial intermediaries in attracting deposits and we generally attract deposits
within our primary market areas. Much of the focus of our expansion and current marketing efforts have been directed toward attracting
additional deposit client relationships and balances. The long-term success of our deposit gathering activities is reflected not only in the
growth of core deposit balances, but also in the level of deposit fees, service charges and other payment processing revenues compared to
prior periods.
One of our key strategies is to strengthen our franchise by emphasizing core deposit activity in non-interest-bearing and other transaction and
savings accounts with less reliance on higher cost certificates of deposit. Increasing core deposits is a fundamental element of our business
strategy. This strategy continues to help control our cost of funds and increase the opportunity for deposit fee revenues, while stabilizing our
funding base. Total deposits decreased $706.9 million, or 5%, to $13.62 billion at December 31, 2022 from $14.33 billion at December 31,
2021. The decrease in total deposits from the prior year end reflects the sale of four branches during 2022, which included the transfer of
$178.2 million of related deposits as well as an overall decrease in market liquidity. Non-interest-bearing deposits decreased by $208.2
million, or 3%, to $6.18 billion at year end from $6.39 billion at December 31, 2021. Interest-bearing transaction and savings accounts
decreased by $383.6 million, or 5%, to $6.72 billion at December 31, 2022 compared to $7.10 billion a year earlier. Certificates of deposit
decreased $115.1 million, or 14%, to $723.5 million at December 31, 2022 from $838.6 million at December 31, 2021. Core deposits were
95% of total deposits at December 31, 2022, compared to 94% a year earlier.
54
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The following table indicates the amount of the Bank’s certificates of deposit with balances in excess of the FDIC insurance limit by time
remaining until maturity as of December 31, 2022 (in thousands):
Table 9: Maturity Period— Certificates of Deposit in excess of the FDIC insurance limit
Certificates of Deposit in Excess of FDIC Insurance Limit
Maturing in three months or less
Maturing after three months through six months
Maturing after six months through twelve months
Maturing after twelve months
Total
$
$
47,716
26,195
48,543
48,870
171,324
The following table provides additional detail on geographic concentrations of our deposits at December 31, 2022, 2021, and 2020 (in
thousands):
Table 10: Geographic Concentration of Deposits
Washington
Oregon
California
Idaho
Total deposits
December 31, 2021
December 31, 2020
Percent
$
December 31, 2022
Amount
7,563,056
2,998,572
2,331,524
726,907
$ 13,620,059
Amount
7,952,376
3,067,054
2,524,296
783,207
100.0 % $ 14,326,933
55.6 % $
22.0
17.1
5.3
Percent
Amount
7,058,404
2,604,908
2,237,949
666,035
100.0 % $ 12,567,296
55.5 % $
21.4
17.6
5.5
Percent
56.2 %
20.7
17.8
5.3
100.0 %
Borrowings. We had $50.0 million FHLB advances at both December 31, 2022 and December 31, 2021, as core deposits were a sufficient
source of funding. At that date, based on pledged collateral, the Bank had $2.99 billion of available credit capacity with the FHLB. At
December 31, 2022, based upon our available unencumbered collateral, the Bank was eligible to borrow $1.19 billion from the Federal
Reserve Bank, however, at that date we had no funds borrowed under this arrangement.
At December 31, 2022, retail repurchase agreements totaled $232.8 million, had a weighted average rate of 0.35%, and were secured by
pledges of certain mortgage-backed securities and agency securities. Retail repurchase agreement balances, which are primarily associated
with client sweep account arrangements, decreased $31.7 million, from the 2021 year-end balance. We had no borrowings under wholesale
repurchase agreements at December 31, 2022 or December 31, 2021.
At December 31, 2022, we had an aggregate of $86.5 million of TPS. This includes $75.0 million issued by us and $11.5 million acquired in
our bank acquisitions. The junior subordinated debentures are carried at their estimated fair value of $74.9 million at December 31, 2022.
Banner redeemed $50.5 million of junior subordinated debentures during the first quarter of 2022 and redeemed $8.2 million of junior
subordinated debentures during the fourth quarter of 2021. At December 31, 2022, the TPS had a weighted average rate of 5.99%. At
December 31, 2022, subordinated notes, net of issuance costs were $98.9 million and had a weighted average interest rate of 5.00%.
Asset Quality. Maintaining a moderate risk profile by employing appropriate underwriting standards, avoiding excessive asset
concentrations and aggressively managing troubled assets has been and will continue to be a primary focus for us.
Non-performing assets decreased to $23.4 million, or 0.15% of total assets, at December 31, 2022, from $23.7 million, or 0.14% of total
assets, at December 31, 2021. At December 31, 2022, our allowance for credit losses - loans was $141.5 million, or 615% of non-performing
loans, compared to $132.1 million, or 578% of non-performing loans at December 31, 2021.
56
The following table sets forth information with respect to our non-performing assets and restructured loans, at the dates indicated (dollars in
thousands):
Table 11: Non-Performing Assets
(1)
Nonaccrual loans:
Secured by real estate:
Commercial
Construction/land
One- to four-family
Commercial business
Agricultural business, including secured by farmland
Consumer
Loans more than 90 days delinquent, still on accrual:
One- to four-family
Commercial business
Consumer
Total non-performing loans
REO assets held for sale, net
Other repossessed assets held for sale, net
Total non-performing assets
Total non-performing assets to total assets
Total nonaccrual loans to net loans before allowance for credit losses
Restructured loans performing under their restructured terms
Loans 30-89 days past due and on accrual
(2)
$
2022
3,683
181
5,236
9,886
594
2,126
21,706
1,023
—
264
1,287
22,993
340
17
$ 23,350
December 31
2021
2020
$ 14,159
479
2,711
2,156
1,022
1,754
22,281
436
2
117
555
22,836
852
17
$ 23,705
$ 18,199
936
3,556
5,407
1,743
2,719
32,560
1,899
1,025
130
3,054
35,614
816
51
$ 36,481
0.15 %
0.21 %
4,241
$
$ 17,186
0.14 %
0.25 %
5,309
$
$ 11,558
0.24 %
0.33 %
6,673
$
$ 12,291
(1)
Includes $44,000 of nonaccrual TDR loans as of December 31, 2022. For the year ended December 31, 2022, interest income was
reduced by $725,000 as a result of nonaccrual loan activity, which includes the reversal of $322,000 of accrued interest as of the date
the loan was placed on nonaccrual. There was no interest income recognized on nonaccrual loans during the year ended December 31,
2022.
(2) These loans were performing under their restructured repayment terms at the dates indicated.
The following table presents the Company’s portfolio of risk-rated loans and non-risk-rated loans by grade at the dates indicated (in
thousands):
Table 12: Loans by Grade
Pass
Special Mention
Substandard
Doubtful
Total
For the years ended December 31,
2021
2020
2022
$
$
10,000,493 $
9,081
137,150
—
10,146,724 $
$
8,874,468
11,932
198,363
—
9,084,763 $
9,494,147
36,598
340,237
—
9,870,982
The decrease in substandard loans during the year ended December 31, 2022 primarily reflects the payoff of substandard loans as well as risk
rating upgrades.
57
Comparison of Results of Operations for the Years Ended December 31, 2022 and 2021
For the year ended December 31, 2022, our net income was $195.4 million, or $5.67 per diluted share, compared to net income of $201.0
million, or $5.76 per diluted share for the year ended December 31, 2021. Current year results were positively impacted by increased interest
income, decreased funding costs and a $7.8 million gain recognized on the branch sale completed during the second quarter of 2022, partially
offset by a $23.1 million decrease in mortgage banking income and a provision for credit losses of $10.4 million.
Our operating results depend largely on our net interest income which increased $56.3 million to $553.2 million, primarily reflecting
increased yields on loans and investment securities due to rising interest rates during the year as well as an increase in average interest-
earning assets, particularly growth in investment securities balances. Revenues (net interest income and non-interest income) increased $35.1
million, or 6%, to $628.4 million for the year ended December 31, 2022, compared to $593.3 million for the year ended December 31, 2021,
which also reflected a $21.2 million decrease in non-interest income primarily as a result of lower income from mortgage banking operations,
partially offset by the gain recognized on the branch sale. The decrease in mortgage banking income reflects a reduction in the volume and a
decrease in the gain on sale margin for one- to four-family loans sold during the year along with a negative fair market adjustment on
multifamily held for sale loans. Non-interest expense decreased to $377.3 million for the year ended December 31, 2022 compared with
$380.1 million for the year ended December 31, 2021, largely as a result of a decrease in professional and legal expenses, a decrease in salary
and employee benefits expense, and a decrease in advertising and marketing expense, partially offset by a decrease in capitalized loan
origination costs.
Net Interest Income. Net interest income increased by $56.3 million, or 11%, to $553.2 million for the year ended December 31, 2022,
compared to $496.9 million for the year ended December 31, 2021, primarily due to an increase in the average balance of interest-earning
assets, increased yields on average interest-earning assets and decreased funding costs, partially offset by a decline in the recognition of
deferred loan fee income due to SBA PPP loan repayments from SBA loan forgiveness. The higher average yield on interest-earning assets
compared to same prior year period reflects rising market interest rates during the year ended December 31, 2022.
The net interest margin on a tax equivalent basis of 3.68% for the year ended December 31, 2022 was 29 basis points higher than the prior
year. The increase in net interest margin compared to a year earlier primarily reflects a 25 basis-point increase in yields on average interest-
earning assets and a three basis-point decrease in the cost of funding liabilities. The increase in average yields on interest-earning assets
during the current year reflects the benefit of variable rate interest-earning assets repricing higher due to rising interest rates, as well as new
loans being originated at higher interest rates, partially offset by a higher percentage of assets being invested in low yielding short term
investments and interest-bearing deposits. Since March 2022, in response to inflation, the FOMC of the Federal Reserve System has
increased the target range for the federal funds rate by 425 basis points, including 125 basis points during the fourth quarter of 2022, to a
range of 4.25% to 4.50%. The decrease in the overall cost of funding liabilities compared to a year earlier was largely due to an increase in
the average balance of low-cost core deposits, including non-interest-bearing transaction and savings accounts
Interest Income. Interest income for the year ended December 31, 2022 was $572.6 million, compared to $520.5 million for the prior year,
an increase of $52.1 million. The increase in interest income occurred as a result of the yields on interest-earnings assets increasing the 25
basis points to 3.80% and the average balance of interest-earning assets increasing $424.6 million to $15.33 billion. The increased yield on
interest-earning assets reflects increases in the average yields on loans and securities.
Interest income on loans increased by $5.2 million to $450.9 million for the year ended December 31, 2022, from the prior year. The
increased interest income on loans is primarily due to the average loan yields increasing 12 basis points to 4.76%, reflecting the impact of
rising interest rates. The acquisition accounting loan discount accretion and related balance sheet impact added four basis points to the loan
yield for the year ended December 31, 2022, compared to seven basis points for the year ended December 31, 2021. Average loans receivable
decreased $116.2 million to $9.60 billion, principally as a result of the forgiveness of SBA PPP loans.
The combined average balance of mortgage-backed securities, other investment securities, equity securities, daily interest-bearing deposits
and FHLB stock increased $540.9 million to $5.74 billion (excluding the effect of fair value adjustments), contributing to the $47.6 million
increase in interest and dividend income compared to the prior year. The average yield on the combined portfolio increased 68 basis points to
2.20%, reflecting a 30 basis-point increase in the average yield on mortgage-backed securities and a 72 basis-point increase in the yield on
other securities.
Interest Expense. Interest expense for the year ended December 31, 2022 was $19.4 million, compared to $23.6 million for the prior year, a
decrease of $4.2 million, or 18%. The decrease in interest expense occurred as a result of a three basis-point decrease in the average cost of
all funding liabilities to 0.13%, partially offset by the average balance of funding liabilities increasing $410.2 million to $14.40 billion. The
increase in average balance of funding liabilities reflects increases in low-cost core deposits, including non-interest-bearing deposits and
interest-bearing transaction and savings accounts, partially offset by lower average balances of certificates of deposit, FHLB advances and
subordinated debt.
Deposit interest expense decreased $1.6 million, or 14%, to $10.1 million for the year ended December 31, 2022 compared to $11.8 million
for the prior year as a result of the average cost of deposits, including non-interest bearing deposits, decreasing two basis points to 0.07%,
partially offset by the average balance of interest-bearing deposits increasing $239.9 million to $7.83 billion. The decrease in the average cost
of deposits between the periods was primarily due to a $301.8 million increase in the average balance of non-interest-bearing accounts, a
higher percentage of our interest-bearing deposits being lower-cost core deposits and a 25 basis-point decrease in the average rate paid on
certificates of deposit.
58
The average rate paid on total borrowings increased two basis points to 2.04%, reflecting the 87 basis-point increase in the average cost of our
subordinated debt and the 55 basis-point increase in the average cost of FHLB advances, partially offset by the $131.5 million decrease in
average balance of total borrowings. The decrease in average total borrowings was largely due to a $82.7 million decrease in average balance
of FHLB advances and a $57.7 million decrease in the average balance of subordinated debt. The decrease in average total borrowings was
the primary reason for the $2.6 million decrease in the related interest expense to $9.3 million for the year ended December 31, 2022, from
$11.8 million in the prior year.
Table 13, Analysis of Net Interest Spread, presents, for the periods indicated, our condensed average balance sheet information, together with
interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing
liabilities. Average balances are computed using daily average balances.
59
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(1) Average balances include loans accounted for on a nonaccrual basis and loans 90 days or more past due. Amortization of net deferred
loan fees/costs is included with interest on loans.
(2) Average other non-interest-bearing liabilities include fair value adjustments related to junior subordinated debentures.
(3) Tax-exempt income is calculated on a tax equivalent basis. The tax equivalent yield adjustment to interest earned on loans was $5.9
million, $5.1 million, and $4.9 million for the years ended December 31, 2022, December 31, 2021, and December 31, 2020,
respectively. The tax equivalent yield adjustment to interest earned on tax exempt securities was $4.8 million, $4.1 million, and $3.5
million for the years ended December 31, 2022, December 31, 2021, and December 31, 2020, respectively.
The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown (in
thousands). Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Effects
on interest income attributable to changes in rate and volume (changes in rate multiplied by changes in volume) have been allocated between
changes in rate and changes in volume (in thousands):
Table 14: Rate/Volume Analysis
Year Ended December 31, 2022
Compared to Year Ended December
31, 2021
Increase (Decrease) in Income/
Expense Due to
Volume
Rate
Net
Year Ended December 31, 2021
Compared to Year Ended December
31, 2020
Increase (Decrease) in Income/
Expense Due to
Volume
Rate
Net
Interest-earning assets:
Held for sale loans
Mortgage loans
Commercial/agricultural loans
SBA PPP loans
Consumer and other loans
Total loans
Mortgage-backed securities
Other securities
Equity securities
Interest-bearing deposits with banks
FHLB stock
Total investment securities
$
329 $
(422) $
(93) $
(712) $
12,870
9,642
21,828
(34)
44,635
7,878
10,836
—
8,443
(109)
27,048
23,514
5,188
(67,005)
68
(38,657)
14,071
7,328
—
(765)
(126)
20,508
36,384
14,830
(45,177)
34
5,978
21,949
18,164
—
7,678
(235)
47,556
(20,989)
(6,509)
26,409
(385)
(2,186)
(5,003)
(3,154)
(183)
(171)
(130)
(8,641)
(1,704) $
(3,774)
(11,579)
312
(1,525)
(18,270)
19,014
11,429
(190)
1,219
(225)
31,247
(2,416)
(24,763)
(18,088)
26,721
(1,910)
(20,456)
14,011
8,275
(373)
1,048
(355)
22,606
Total net change in interest income on interest-earning
assets
71,683
(18,149)
53,534
(10,827)
12,977
2,150
Interest-bearing liabilities:
Interest-bearing checking accounts
Savings accounts
Money market accounts
Certificates of deposit
Total interest-bearing deposits
FHLB advances
Other borrowings
Subordinated debt
Total borrowings
Total net change in interest expense on interest-bearing
liabilities
Net change in net interest income (tax equivalent)
272
107
404
(2,003)
(1,220)
451
(107)
1,912
2,256
97
113
69
(705)
(426)
(2,554)
17
(2,292)
(4,829)
369
220
473
(2,708)
(1,646)
(2,103)
(90)
(380)
(2,573)
(1,112)
(3,453)
(4,579)
(5,215)
(14,359)
784
(383)
(155)
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821
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1,114
(3,215)
247
1,731
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(291)
(2,424)
(3,605)
(6,925)
(13,245)
(2,431)
(136)
1,576
(991)
1,036
(5,255)
$ 70,647 $ (12,894) $ 57,753 $
(4,219)
(14,113)
(14,236)
(123)
3,286 $ 13,100 $ 16,386
61
Provision and Allowance for Credit Losses. We recorded an $8.2 million provision for credit losses - loans in the year ended December 31,
2022, compared to a $33.1 million recapture of provision for credit losses - loans recorded in 2021. The provision and allowance for credit
losses is one of the most critical accounting estimates included in our Consolidated Financial Statements.
The provision for credit losses - loans reflects the amount required to maintain the allowance for credit losses - loans at an appropriate level
based upon management’s evaluation of the adequacy of collective and individual loss reserves. The provision for credit losses - loans for the
current year primarily reflects loan growth and, to a lesser extent, a deterioration in forecasted economic conditions and indicators utilized to
estimate credit losses, partially offset by an improvement in the level of adversely classified loans. The prior year recapture of provision for
credit losses - loans primarily reflected an improvement in forecasted economic indicators and a decrease in adversely classified loans. Future
assessments of the expected credit losses will not only be impacted by changes to the reasonable and supportable forecast, but will also
include an updated assessment of qualitative factors, as well as consideration of any required changes in the reasonable and supportable
forecast reversion period.
We recorded net recoveries of $1.2 million for the year ended December 31, 2022, compared to net charge-offs of $2.1 million for the prior
year. The reduction in net charge-offs in 2022 reflects the improvement in overall loan portfolio performance during 2022. A comparison of
the allowance for credit losses - loans at December 31, 2022 and 2021 reflects an increase of $9.4 million, or 7%, to $141.5 million at
December 31, 2022, from $132.1 million at December 31, 2021. The allowance for credit losses - loans as a percentage of total loans (loans
receivable excluding allowance for credit losses) decreased to 1.39% at December 31, 2022, compared to 1.45% at December 31, 2021. The
decrease in the allowance for credit losses - loans as a percentage of loans reflects an improvement in the level of adversely classified loans
during 2022.
The following table sets forth an analysis of our allowance for credit losses - loans for the periods indicated (dollars in thousands):
Table 15: Changes in Allowance for Credit Losses - Loans
Balance, beginning of period
Beginning balance adjustment for adoption of ASC 326
Provision (recapture) for credit losses – loans
Recoveries of loans previously charged off:
Commercial real estate
Construction and land
One- to four-family residential
Commercial business
Agricultural business, including secured by farmland
Consumer
Total recoveries
Loans charged off:
Commercial real estate
Multifamily real estate
Construction and land
One- to four-family residential
Commercial business
Agricultural business, including secured by farmland
Consumer
Total charge-offs
Net recoveries (charge-offs)
Balance, end of period
Total loans
Average outstanding loans
Total nonaccrual loans
Allowance for credit losses - loans as a percent of total loans
Net loan recoveries (charge-offs) as a percent of average outstanding loans during the
period
Allowance for credit losses - loans as a percent of nonaccrual loans
62
Years Ended December 31
2022
2021
2020
$ 132,099
—
8,158
$ 167,279
—
(33,112)
$ 100,559
7,812
64,285
392
384
181
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566
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1,729
100
199
1,797
30
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4,615
275
105
467
3,265
1,823
328
6,263
(2)
—
(30)
—
(1,699)
(42)
(940)
(2,713)
1,208
$ 141,465
$10,146,724
$9,595,250
21,706
$
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(59)
—
—
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(181)
(914)
(6,683)
(2,068)
$ 132,099
$ 9,084,763
$ 9,711,481
22,281
$
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(66)
(100)
(136)
(7,253)
(591)
(1,640)
(11,640)
(5,377)
$ 167,279
$ 9,870,982
$10,121,808
32,560
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Non-interest Income. The following table presents the key components of non-interest income for the years ended December 31, 2022,
2021, and 2020 (dollars in thousands):
Table 18: Non-interest Income
Deposit fees and other service
charges
Mortgage banking operations
Bank-owned life insurance
Miscellaneous
Net (loss) gain on sale of
securities
Net change in valuation of
financial instruments carried at
fair value
Gain on sale of branches,
including related deposits
Total non-interest income
2022 compared to 2021
2021 compared to 2020
2022
2021
Change
Amount
Change
Percent
2021
2020
Change
Amount
Change
Percent
$ 44,459 $ 39,495 $ 4,964
(23,114)
2,794
(6,070)
(21,426)
10,834
7,794
6,805
69,892
33,948
5,000
12,875
91,318
12.6 % $ 39,495 $ 34,384 $
(68.1)%
55.9 %
(47.1)%
(23.5)%
51,083
5,972
6,821
98,260
33,948
5,000
12,875
91,318
5,111
(17,135)
(972)
6,054
(6,942)
14.9 %
(33.5)%
(16.3)%
88.8 %
(7.1)%
(3,248)
482
(3,730)
(773.9)%
482
1,012
(530)
(52.4)%
807
4,616
(3,809)
(82.5)%
4,616
(656)
5,272
(803.7)%
7,804
7,804
$ 75,255 $ 96,416 $ (21,161)
—
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(21.9)% $ 96,416 $ 98,616 $
—
—
(2,200)
— %
(2.2)%
Non-interest income decreased for the year ended December 31, 2022, compared to the year ended December 31, 2021. The decrease from
the prior year primarily reflects lower income from mortgage banking operations, partially offset by the gain recognized on the branch sale
and increased deposit fees and other service charges. Income from deposit fees and other service charges increased for the year ended
December 31, 2022, compared to the prior year, primarily as a result of increased transaction deposit account activity and the benefits from
implementing Banner Forward initiatives. Mortgage banking income, including gains on one- to four-family and multifamily loan sales and
loan servicing fees, decreased for the year ended December 31, 2022, compared to the prior year. Sales of one- to four-family loans held for
sale for the year ended December 31, 2022, resulted in gains of $9.9 million, compared to $28.7 million for the year ended December 31,
2021. In addition, for the year ended December 31, 2022, mortgage banking income included $2.1 million of gains on the sale of multifamily
loans, compared to $5.8 million for the year ended December 31, 2021. The lower mortgage banking revenue reflected a reduction in the
volume and a decrease in the gain on sale margin on one- to four-family loans sold along with a negative fair market adjustment on
multifamily held for sale loans. The reduction in one-to four family loans sold primarily reflects a reduction in refinancing activity, as well as
decreased purchase activity as interest rates increased during 2022. The increase in bank owned life insurance income for year ended
December 31, 2022 compared to the prior year was due to new bank-owned life insurance investments made at the end of 2021 and early in
2022. The $6.1 million decrease in miscellaneous income was primarily driven by a valuation adjustment on the SBA servicing asset
recognized during the prior year as well as lower gains on the sale of SBA loans and higher gains related to the disposition of assets from
closed branch locations recognized during the prior year.
64
Non-interest Expense. The following table represents key elements of non-interest expense for the years ended December 31, 2022, 2021,
and 2020 (dollars in thousands).
Table 19: Non-interest Expense
Salary and employee benefits
Less capitalized loan origination
costs
Occupancy and equipment
Information and computer data
services
Payment and card processing
services
Professional and legal expenses
Advertising and marketing
Deposit insurance
State and municipal business and
use taxes
Real estate operations, net
Amortization of core deposit
intangibles
Loss on extinguishment of debt
Miscellaneous
COVID-19 expenses
Merger and acquisition-related
expenses
Total non-interest expense
2022 compared to 2021
2021 compared to 2020
Change
Amount
$ 242,266 $ 244,351 $ (2,085)
2021
2022
Change
Percent
2021
(0.9)% $ 244,351 $ 245,400 $
2020
Change
Amount
(24,313)
52,018
(34,401)
52,850
10,088
(832)
(29.3)%
(1.6)%
(34,401)
52,850
(34,848)
53,362
25,986
24,356
1,630
6.7 %
24,356
24,386
21,195
14,005
3,959
6,649
20,544
22,274
6,036
5,583
4,693
(104)
4,343
(22)
651
(8,269)
(2,077)
1,066
350
(82)
3.2 %
(37.1)%
(34.4)%
19.1 %
8.1 %
372.7 %
20,544
22,274
6,036
5,583
16,095
12,093
6,412
6,516
4,343
(22)
4,355
(190)
5,279
793
24,869
6,571
(1,292)
2,284
(1,491)
633
24,236
$ 377,295 $ 379,005 $ (1,710)
(436)
436
—
—
(660)
$ 377,295 $ 380,101 $ (2,806)
660
6,571
2,284
24,236
(19.7)%
(65.3)%
2.6 %
(0.5)% $ 379,005 $ 364,025 $
436
7,732
—
22,712
3,502
(100.0)%
(100.0)%
660
(0.7)% $ 380,101 $ 369,589 $
2,062
Change
Percent
(0.4)%
(1.3)%
(1.0)%
(0.1)%
27.6 %
84.2 %
(5.9)%
(14.3)%
(0.3)%
(88.4)%
(15.0)%
nm
6.7 %
4.1 %
(87.5)%
(68.0)%
2.8 %
(1,049)
447
(512)
(30)
4,449
10,181
(376)
(933)
(12)
168
(1,161)
2,284
1,524
14,980
(3,066)
(1,402)
10,512
Non-interest expense for the year ended December 31, 2022 decreased as compared to the same period in 2021. The decrease was primarily
due to a decrease in professional and legal expenses, a decrease in salary and employee benefits expense, and a decrease in advertising and
marketing expense, partially offset by a decrease in capitalized loan origination costs.
Salary and employee benefits expenses decreased for the year ended December 31, 2022, compared to the prior year, primarily reflecting a
reduction in staffing, partially offset by increases in salaries. Capitalized loan origination costs decreased for the year ended December 31,
2022, compared to the prior year, primarily due to decreases in production of one- to four-family residential and construction loans and the
origination of SBA PPP loans during 2021. Information and computer data services expenses increased for the year ended December 31,
2022, compared to 2021, primarily due to an increase in computer software expenses. Professional and legal expense decreased for the year
ended December 31, 2022 from the year ended December 31, 2021, primarily due to a decrease in consulting expense. Advertising and
marketing expenses decreased for the year ended December 31, 2022 from the year ended December 31, 2021, primarily due to a reduction in
direct mail marketing expenses. Deposit insurance expense increased for the year ended December 31, 2022, compared to the same period in
2021, due to an increase in our assessment rate during the second quarter of 2022.
For the year ended December 31, 2022, the Company recognized a $793,000 loss on extinguishment of debt as a result of the redemption of
$50.5 million of junior subordinated debentures during the year, compared to a $2.3 million loss on extinguishment of debt as a result of the
redemption of $8.2 million of junior subordinated debentures during the year ended December 31, 2021.
Income Taxes. For the year ended December 31, 2022, we recognized $45.4 million in income tax expense for an effective rate of 18.9%,
which reflects our statutory tax rate reduced by the effect of tax-exempt income, certain tax credits, and tax benefits related to restricted stock
vesting. Our blended federal and state statutory income tax rate is 23.5%, representing a blend of the statutory federal income tax rate of
21.0% and apportioned effects of the state and local jurisdictions where we do business. For the year ended December 31, 2021, we
recognized $45.5 million in income tax expense for an effective tax rate of 18.5%.
Comparison of Results of Operations for the Years Ended December 31, 2021 and 2020
See Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the
year ended December 31, 2021 previously filed with the SEC.
65
Market Risk and Asset/Liability Management
Our financial condition and operations are influenced significantly by general economic conditions, including the absolute level of interest
rates as well as changes in interest rates and the slope of the yield curve. Our profitability is dependent to a large extent on our net interest
income, which is the difference between the interest received from our interest-earning assets and the interest expense incurred on our
interest-bearing liabilities.
Our activities, like all financial institutions, inherently involve the assumption of interest rate risk. Interest rate risk is the risk that changes in
market interest rates will have an adverse impact on the institution’s earnings and underlying economic value. Interest rate risk is determined
by the maturity and repricing characteristics of an institution’s assets, liabilities and off-balance-sheet contracts. Interest rate risk is measured
by the variability of financial performance and economic value resulting from changes in interest rates. Interest rate risk is the primary
market risk affecting our financial performance.
The greatest source of interest rate risk to us results from the mismatch of maturities or repricing intervals for rate sensitive assets, liabilities
and off-balance-sheet contracts. This mismatch or gap is generally characterized by a substantially shorter maturity structure for interest-
bearing liabilities than interest-earning assets, although our floating-rate assets tend to be more immediately responsive to changes in market
rates than most deposit liabilities. Additional interest rate risk results from mismatched repricing indices and formula (basis risk and yield
curve risk), and product caps and floors and early repayment or withdrawal provisions (option risk), which may be contractual or market
driven, that are generally more favorable to clients than to us. An exception to this generalization is the beneficial effect of interest rate floors
on a portion of our performing floating-rate loans, which help us maintain higher loan yields in periods when market interest rates decline
significantly. However, in a declining interest rate environment, as loans with floors are repaid they generally are replaced with new loans
which have lower interest rate floors. As of December 31, 2022, our loans with interest rate floors totaled $4.40 billion and had a weighted
average floor rate of 4.15% compared to a current average note rate of 5.91%. As of December 31, 2022, our loans with interest rates at their
floors totaled $1.58 billion and had a weighted average note rate of 4.09%. The Company actively manages its exposure to interest rate risk
through on-going adjustments to the mix of interest-earning assets and funding sources that affect the repricing speeds of loans, investments,
interest-bearing deposits and borrowings.
The principal objectives of asset/liability management are: to evaluate the interest rate risk exposure; to determine the level of risk appropriate
given our operating environment, business plan strategies, performance objectives, capital and liquidity constraints, and asset and liability
allocation alternatives; and to manage our interest rate risk consistent with regulatory guidelines and policies approved by the Board of
Directors. Through such management, we seek to reduce the vulnerability of our earnings and capital position to changes in the level of
interest rates. Our actions in this regard are taken under the guidance of the Asset/Liability Management Committee, which is comprised of
members of our senior management. The Committee closely monitors our interest sensitivity exposure, asset and liability allocation
decisions, liquidity and capital positions, and local and national economic conditions and attempts to structure the loan and investment
portfolios and funding sources to maximize earnings within acceptable risk tolerances.
Sensitivity Analysis
Our primary monitoring tool for assessing interest rate risk is asset/liability simulation modeling, which is designed to capture the dynamics
of balance sheet, interest rate and spread movements and to quantify variations in net interest income resulting from those movements under
different rate environments. The sensitivity of net interest income to changes in the modeled interest rate environments provides a
measurement of interest rate risk. We also utilize economic value analysis, which addresses changes in estimated net economic value of
equity arising from changes in the level of interest rates. The net economic value of equity is estimated by separately valuing our assets and
liabilities under varying interest rate environments. The extent to which assets gain or lose value in relation to the gains or losses of liability
values under the various interest rate assumptions determines the sensitivity of net economic value to changes in interest rates and provides an
additional measure of interest rate risk.
The interest rate sensitivity analysis performed by us incorporates beginning-of-the-period rate, balance and maturity data, using various
levels of aggregation of that data, as well as certain assumptions concerning the maturity, repricing, amortization and prepayment
characteristics of loans and other interest-earning assets and the repricing and withdrawal of deposits and other interest-bearing liabilities into
an asset/liability simulation model. We update and prepare simulation modeling at least quarterly for review by senior management and
oversight by the directors. We believe the data and assumptions are realistic representations of our portfolio and possible outcomes under the
various interest rate scenarios. Nonetheless, the interest rate sensitivity of our net interest income and net economic value of equity could
vary substantially if different assumptions were used or if actual experience differs from the assumptions used.
66
The following table sets forth as of December 31, 2022, the estimated changes in our net interest income over one-year and two-year time
horizons and the estimated changes in economic value of equity based on the indicated interest rate environments (dollars in thousands):
Table 20: Interest Rate Risk Indicators
(1)
Change (in Basis Points) in Interest Rates
+300
+200
+100
0
-100
-200
December 31, 2022
Estimated Increase (Decrease) in
Net Interest Income
Next 24 Months
44,449
51,108
36,020
—
(65,771)
(156,244)
3.3 %
3.8
2.6
—
(4.8)
(11.5)
Net Interest Income
Next 12 Months
17,134
20,389
14,509
—
(25,785)
(60,927)
2.6 %
3.1
2.2
—
(3.9)
(9.2)
Economic Value of
Equity
(424,550)
(251,748)
(94,389)
—
(10,575)
(138,455)
(11.6)%
(6.9)
(2.6)
—
(0.3)
(3.8)
(1) Assumes an instantaneous and sustained uniform change in market interest rates at all maturities; however, no rates are allowed to go
below zero. The targeted Federal Funds Rate was between 4.25% and 4.50% at December 31, 2022.
Another (although less reliable) monitoring tool for assessing interest rate risk is gap analysis. The matching of the repricing characteristics
of assets and liabilities may be analyzed by examining the extent to which assets and liabilities are interest sensitive and by monitoring an
institution’s interest sensitivity gap. An asset or liability is said to be interest sensitive within a specific time period if it will mature or reprice
within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated,
based upon certain assumptions, to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated to
mature or reprice, based upon certain assumptions, within that same time period. A gap is considered positive when the amount of interest-
sensitive assets exceeds the amount of interest-sensitive liabilities. A gap is considered negative when the amount of interest-sensitive
liabilities exceeds the amount of interest-sensitive assets. Generally, during a period of rising rates, a negative gap would tend to adversely
affect net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest
income.
Certain shortcomings are inherent in gap analysis. For example, although certain assets and liabilities may have similar maturities or periods
of repricing, they may react in different degrees to changes in market rates. Also, the interest rates on certain types of assets and liabilities
may fluctuate in advance of changes in market rates, while interest rates on other types may lag behind changes in market rates. Additionally,
certain assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the
asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those
assumed in calculating the table. Finally, the ability of some borrowers to service their debt may decrease in the event of a severe change in
market rates.
Table 21, Interest Sensitivity Gap, presents our interest sensitivity gap between interest-earning assets and interest-bearing liabilities at
December 31, 2022. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities which are anticipated
by us, based upon certain assumptions, to reprice or mature in each of the future periods shown. At December 31, 2022, total interest-earning
assets maturing or repricing within one year exceeded total interest-bearing liabilities maturing or repricing in the same time period by $3.16
billion, representing a one-year cumulative gap to total assets ratio of 19.96%.
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(1) Adjustable-rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which
they are due to mature, and fixed-rate assets are included in the period in which they are scheduled to be repaid based upon scheduled
amortization, in each case adjusted to take into account estimated prepayments. Mortgage loans and other loans are not reduced for
allowances for credit losses and non-performing loans. Mortgage loans, mortgage-backed securities, other loans and investment
securities are not adjusted for deferred fees and unamortized acquisition premiums and discounts.
(2) Adjustable-rate liabilities are included in the period in which interest rates are next scheduled to adjust rather than in the period they
are due to mature. Although regular savings, demand, interest-bearing checking, and money market deposit accounts are subject to
immediate withdrawal, based on historical experience management considers a substantial amount of such accounts to be core
deposits having significantly longer maturities. For the purpose of the gap analysis, these accounts have been assigned decay rates to
reflect their longer effective maturities. If all of these accounts had been assumed to be short-term, the one-year cumulative gap of
interest-sensitive assets would have been $(2.54) billion, or (16.04)% of total assets at December 31, 2022. Interest-bearing liabilities
for this table exclude certain non-interest-bearing deposits that are included in the average balance calculations reflected in Table 13,
Analysis of Net Interest Spread.
Management is aware of the sources of interest rate risk and in its opinion actively monitors and manages it to the extent possible. The Bank’s
objectives in using interest rate derivatives are to reduce volatility in net interest income and to manage its exposure to interest rate
movements. To accomplish this objective, the Bank uses interest rate swaps as part of its interest rate risk management strategy. The Bank
enters into interest rate swaps with certain qualifying commercial loan clients. The Bank simultaneously enters into interest rate swaps with
dealer counterparties, with identical notional amounts and terms. The net result of these interest rate swaps is that the client pays a fixed rate
of interest and the Bank receives a floating rate.
During the fourth quarter of 2021, the Bank entered into interest rate swaps designated as cash flow hedges to hedge the variable cash flows
associated with existing floating rate loans. These hedge contracts involve the receipt of fixed-rate amounts from a counterparty in exchange
for the Bank making floating-rate payments over the life of the agreements without exchange of the underlying notional amount. The Bank is
a party to $400.0 million in notional amounts of these types of interest rate swaps at December 31, 2022
Based on our analysis of the interest rate risk scenarios and our strategies for managing our risk, management believes that our current level
of interest rate risk is reasonable.
Liquidity and Capital Resources
Our primary sources of funds are deposits, borrowings, proceeds from loan principal and interest payments and sales of loans, and the
maturity of and interest income on mortgage-backed and investment securities. While maturities and scheduled amortization of loans and
mortgage-backed securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market
interest rates, economic conditions, competition and our pricing strategies.
Our primary investing activity is the origination of loans and, in certain periods, the purchase of securities or loans. During the years ended
December 31, 2022 and 2021, our loan originations, including originations of loans held for sale, exceeded our loan repayments by $1.30
billion and $306.8 million, respectively. During those same periods we purchased loans of $126.6 million and $5.1 million, respectively.
This activity was funded primarily by the reduction in the balance of cash held as interest-bearing deposits. During the years ended
December 31, 2022 and 2021, we received proceeds of $429.7 million and $1.32 billion, respectively, from the sale of loans. Securities
purchased during the years ended December 31, 2022 and 2021 totaled $850.6 million and $2.94 billion, respectively, and securities
repayments, maturities and sales in those same periods were $639.4 million and $1.43 billion, respectively.
Our primary financing activity is gathering deposits. Total deposits decreased by $706.9 million during the year ended December 31, 2022,
as core deposits decreased by $591.8 million and certificates of deposit decreased by $115.1 million. The decrease in total deposits during
2022 reflects the sale of four branches, which included the transfer of $178.2 million of related deposits, as well as an overall decline in
market liquidity. At December 31, 2022, core deposits totaled $12.90 billion, or 95% of total deposits, compared with $13.49 billion, or 94%
of total deposits at December 31, 2021. Certificates of deposit are generally more vulnerable to competition and more price sensitive than
other retail deposits and our pricing of those deposits varies significantly based upon our liquidity management strategies at any point in time.
At December 31, 2022, certificates of deposit totaled $723.5 million, or 5% of our total deposits, including $531.6 million which were
scheduled to mature within one year. Certificates of deposit decreased from 6% of our total deposits at December 31, 2021. While no
assurance can be given as to future periods, historically, we have been able to retain a significant amount of our certificates of deposit as they
mature.
We had $50.0 million of FHLB advances at both December 31, 2022 and December 31, 2021. Other borrowings at December 31, 2022
decreased $31.7 million to $232.8 million following an increase of $79.7 million in 2021. Both the FHLB advances and other borrowings
outstanding at December 31, 2022 mature during 2023.
69
We must maintain an adequate level of liquidity to ensure the availability of sufficient funds to accommodate deposit withdrawals, to support
loan growth, to satisfy financial commitments and to take advantage of investment opportunities. During the years ended December 31, 2022
and 2021, we used our sources of funds primarily to fund loan commitments and purchase securities. At December 31, 2022, we had
outstanding loan commitments totaling $4.17 billion, primarily relating to undisbursed loans in process and unused credit lines. While
representing potential growth in the loan portfolio and lending activities, this level of commitments is proportionally consistent with our
historical experience and does not represent a departure from normal operations. For the year ended December 31, 2023, we have
$20.6 million of purchase obligations under contracts with our key vendors to provide services, mainly information technology related
contracts. In addition, for the year ended December 31, 2023, we have $14.4 million of commitments under operating lease agreements.
We generally maintain sufficient cash and readily marketable securities to meet short-term liquidity needs; however, our primary liquidity
management practice to supplement deposits is to increase or decrease short-term borrowings, including FHLB advances and Federal Reserve
Bank of San Francisco (FRBSF) borrowings. We maintain credit facilities with the FHLB, which provided for advances that in the aggregate
would equal the lesser of 45% of the Bank’s assets or adjusted qualifying collateral (subject to a sufficient level of ownership of FHLB
stock). At December 31, 2022, under these credit facilities based on pledged collateral, the Bank had $2.99 billion of available credit
capacity. Advances under these credit facilities totaled $50.0 million at December 31, 2022. In addition, the Bank has been approved for
participation in the FRBSF’s Borrower-In-Custody program. Under this program, based on pledged collateral, the Bank had available lines of
credit of approximately $1.19 billion as of December 31, 2022, subject to certain collateral requirements, namely the collateral type and risk
rating of eligible pledged loans. We had no funds borrowed from the FRBSF at December 31, 2022 or 2021. At December 31, 2022, the
Bank also had uncommitted federal funds line of credit agreements with other financial institutions totaling $125.0 million. No balances were
outstanding under these agreements as of December 31, 2022 or 2021. Availability of lines is subject to federal funds balances available for
loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs and the agreements may restrict
consecutive day usage. Management believes it has adequate resources and funding potential to meet our foreseeable liquidity requirements.
Banner is a separate legal entity from the Bank and, on a stand-alone level, must provide for its own liquidity and pay its own operating
expenses and cash dividends. Banner’s primary sources of funds consist of capital raised through dividends or capital distributions from the
Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. We currently expect to continue our current
practice of paying quarterly cash dividends on our common stock subject to our Board of Directors’ discretion to modify or terminate this
practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is $0.48 per share, as approved
by our Board of Directors, which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and
investing in the Bank, and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2023 at this
rate of $0.48 per share, our average total dividend paid each quarter would be approximately $16.4 million based on the number of
outstanding shares at December 31, 2022. At December 31, 2022, Banner (on an unconsolidated basis) had liquid assets of $77.5 million.
During the year ended December 31, 2022, total shareholders’ equity decreased $233.9 million to $1.46 billion. At December 31, 2022,
tangible common shareholders’ equity, which excludes goodwill and other intangible assets, was $1.07 billion, or 6.95% of tangible assets.
See “Executive Overview” above for a reconciliation of total shareholders’ equity to tangible common shareholders’ equity, which is a non-
GAAP financial measure.
Capital Requirements
Banner is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements
of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. The Bank, as
state-chartered, federally insured commercial bank, is subject to the capital requirements established by the FDIC.
The capital adequacy requirements are quantitative measures established by regulation that require Banner and the Bank to maintain
minimum amounts and ratios of capital. The Federal Reserve requires Banner to maintain capital adequacy that generally parallels the FDIC
requirements. The FDIC requires the Bank to maintain minimum ratios of Total Capital, Tier 1 Capital, and Common Equity Tier 1 Capital
to risk-weighted assets as well as Tier 1 leverage capital to average assets. In addition to the minimum capital ratios, the Bank has to maintain
a capital conservation buffer consisting of additional Common Equity Tier 1 Capital greater than 2.5% of risk-weighted assets above the
required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses.
At December 31, 2022, Banner and the Bank each exceeded all current regulatory capital requirements to be “well-capitalized” and the fully
phased-in capital conservation buffer requirement.
The following table shows the regulatory capital ratios for Banner and the Bank, as of December 31, 2022.
Table 22: Regulatory Capital Ratios
Capital Ratios
Total capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Tier 1 capital to average leverage assets
Tier 1 common equity to risk-weighted assets
Banner Corporation
14.04 %
12.13
9.45
11.44
Banner Bank
13.38 %
12.27
9.55
12.27
70
ITEM 7A – Quantitative and Qualitative Disclosures about Market Risk
See pages 66–69 of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 8 – Financial Statements and Supplementary Data
For financial statements, see index on page 77.
ITEM 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
ITEM 9A – Controls and Procedures
The management of Banner is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Rule 13a-15(f) of the Securities Exchange Act of 1934 (Exchange Act). A control procedure, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that its objectives are met. Also, because of the inherent limitations in all
control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the
Company have been detected. Additionally, in designing disclosure controls and procedures, our management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure
controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential future conditions. As a result of these inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Further, projections of any evaluation of effectiveness to
future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of our disclosure controls and procedures (as defined in Rule
13a-15(e) of the Exchange Act) was carried out under the supervision and with the participation of our Chief Executive Officer, Chief
Financial Officer and several other members of our senior management as of the end of the period covered by this report. Based on their
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2022, our disclosure controls and
procedures were effective in ensuring that the information required to be disclosed by us in the reports we file or submit under the Exchange
Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) in a timely
manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
(b) Changes in Internal Controls Over Financial Reporting: There was no change in our internal control over financial reporting during the
fourth quarter of the period covered by this Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting: Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we
included a report of management’s assessment of the effectiveness of its internal controls beginning on page 79 of this Annual Report on
Form 10-K for the year ended December 31, 2022.
ITEM 9B – Other Information
None.
ITEM 9C-Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable
71
ITEM 10 – Directors, Executive Officers and Corporate Governance
PART III
The information required by this item contained under the section captioned “Proposal 1– Election of Directors,” “Meetings and Committees
of the Board of Directors” and “Shareholder Proposals” in the Proxy Statement for the Annual Meeting of Shareholders, which will be filed
with the SEC no later than 120 days after the end of our fiscal year, is incorporated herein by reference.
Information regarding the executive officers of the Registrant is provided herein in Part I, Item 1 hereof.
The information regarding our Audit Committee and Financial Expert included under the sections captioned “Meetings and Committees of
the Board of Directors” and “Audit Committee Matters” in the Proxy Statement for the Annual Meeting of Shareholders, which will be filed
with the SEC no later than 120 days after the end of our fiscal year, is incorporated herein by reference.
There have been no material changes to the procedures by which stockholders may recommend nominees to our board of directors since last
disclosed to stockholders.
Code of Ethics
The Board of Directors has adopted a Code of Ethics and Business Conduct for our directors, officers (including its senior financial officers),
and employees. The Code of Ethics and Business Conduct was most recently approved by the Board of Directors on July 28, 2021; and the
Code of Ethics and Business Conduct is reviewed by the Board on an annual basis. The Code of Ethics and Business Conduct requires our
officers, directors, and employees to maintain the highest standards of professional conduct. A copy of the Code of Ethics and Business
Conduct in substantially its current form was filed as an exhibit with Form 8-K on August 11, 2021 and is available without charge, upon
request to Investor Relations, Banner Corporation, P.O. Box 907, Walla Walla, WA 99362. The Code is also available on the Company’s
website at www.bannerbank.com.
We subscribe to the Ethicspoint reporting system and encourage employees, clients, and vendors to call the Ethicspoint hotline at 1-866-
ETHICSP (384-4277) or visit its website at www.Ethicspoint.com to report any concerns regarding financial statement disclosures,
accounting, internal controls, or auditing matters. We will not retaliate against any of our officers or employees who raise legitimate concerns
or questions about an ethics matter or a suspected accounting, internal control, financial reporting, or auditing discrepancy or otherwise assists
in investigations regarding conduct that the employee reasonably believes to be a violation of Federal Securities Laws or any rule or
regulation of the SEC, federal securities laws relating to fraud against shareholders or violations of applicable banking laws. Non-retaliation
against employees is fundamental to our Code of Ethics and there are strong legal protections for those who, in good faith, raise an ethical
concern or a complaint about their employer.
ITEM 11 – Executive Compensation
Information required by this item regarding management compensation and employment contracts, director compensation, and compensation
committee interlocks and insider participation is incorporated by reference to the sections captioned “Executive Compensation,” “Directors’
Compensation,” and “Compensation Discussion and Analysis - Compensation and Human Capital Committee Interlocks and Insider
Participation,” respectively, in the Proxy Statement for the Annual Meeting of Shareholders, which will be filed with the SEC no later than
120 days after the end of our fiscal year.
ITEM 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a) Security Ownership of Certain Beneficial Owners and Management
Information required by this item is incorporated herein by reference to the section captioned “Security Ownership of Certain Beneficial
Owners and Management” in the proxy statement for the Annual Meeting of Shareholders, which will be filed with the Securities and
Exchange Commission no later than 120 days after the end of our fiscal year.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to the section captioned “Security Ownership of Certain Beneficial
Owners and Management” in the proxy statement for the Annual Meeting of Shareholders, which will be filed with the Securities and
Exchange Commission no later than 120 days after the end of our fiscal year.
(c) Change in Control
Banner is not aware of any arrangements, including any pledge by any person of securities of Banner, the operation of which may at a
subsequent date result in a change in control of Banner.
72
(d) Equity Compensation Plan Information
The following table sets forth information about equity compensation plans that were in effect at December 31, 2022:
Plan category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
(A)
Number of securities
to be issued upon
exercise of
outstanding options,
(1)
warrants and rights
(B)
Weighted average
exercise price of
outstanding options,
(1)
warrants and rights
(C)
Number of securities
remaining available
for future issuance
under equity
(2)
compensation plans
382,727
—
382,727
N/A
—
541,524
—
541,524
(1) Represents shares that are issuable pursuant to awards of restricted stock units for which there is no applicable exercise price.
(2) All of the securities remaining available for future issuance under the equity compensation plans approved by security holders are
available for issuance as stock awards.
ITEM 13 – Certain Relationships and Related Transactions, and Director Independence
The information required by this item contained under the sections captioned “Related Party Transactions” and “Director Independence” in
the Proxy Statement for the Annual Meeting of Shareholders, which will be filed with the SEC no later than 120 days after the end of our
fiscal year, is incorporated herein by reference.
ITEM 14 – Principal Accounting Fees and Services
The information required by this item contained under the section captioned “Proposal 4– Ratification of Selection of Independent Registered
Public Accounting Firm” in the Proxy Statement for the Annual Meeting of Shareholders, which will be filed with the SEC no later than 120
days after the end of our fiscal year, is incorporated herein by reference.
73
PART IV
ITEM 15 – Exhibits and Financial Statement Schedules
(a)
(1)
Financial Statements
See Index to Consolidated Financial Statements on page 77.
Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable or not required, or because the required
information is included in the Consolidated Financial Statements or the Notes thereto or in Part 1, Item 1.
Exhibits
See Index of Exhibits on page 144.
(2)
(3)
(b)
Exhibits
See Index of Exhibits on page 144.
74
Item 16 - Form 10-K Summary.
None.
75
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Signatures
Date: February 21, 2023
Banner Corporation
/s/ Mark J. Grescovich
Mark J. Grescovich
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
/s/ Mark J. Grescovich
Mark J. Grescovich
President and Chief Executive Officer; Director
(Principal Executive Officer)
/s/ Peter J. Conner
Peter J. Conner
Executive Vice President, Treasurer and Chief Financial
Officer
(Principal Financial and Accounting Officer)
Date: February 21, 2023
/s/ John R. Layman
John R. Layman
Director
Date: February 21, 2023
/s/ Connie R. Collingsworth
Connie R. Collingsworth
Director
Date: February 21, 2023
/s/ Margot J. Copeland
Margot J. Copeland
Director
Date: February 21, 2023
/s/ Terry Schwakopf
Terry Schwakopf
Director
Date: February 21, 2023
/s/ Roberto R. Herencia
Roberto R. Herencia
Chairman of the Board
Date: February 21, 2023
Date: February 21, 2023
/s/ Paul J. Walsh
Paul J. Walsh
Director
Date: February 21, 2023
/s/ Ellen R.M. Boyer
Ellen R.M. Boyer
Director
Date: February 21, 2023
/s/ David A. Klaue
David A. Klaue
Director
Date: February 21, 2023
/s/ Kevin F. Riordan
Kevin F. Riordan
Director
Date: February 21, 2023
/s/ John Pedersen
John Pedersen
Director
Date: February 21, 2023
76
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
BANNER CORPORATION AND SUBSIDIARIES
(Item 8 and Item 15(a)(1))
Report of Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management Report on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm (Moss Adams LLP, Spokane, Washington, PCAOB ID: 659) . . . . . . .
Consolidated Statements of Financial Condition as of December 31, 2022 and 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the Years Ended December 31, 2022, 2021 and 2020 . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021 and 2020 . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2022, 2021 and 2020 . . . . . . . .
Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020 . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
78
79
80
83
84
85
86
87
89
77
February 21, 2023
Report of Management
To the Shareholders:
The management of Banner Corporation (the Company) is responsible for the preparation, integrity, and fair presentation of its published
financial statements and all other information presented in this annual report. The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and, as such, include amounts based on informed judgments and
estimates made by management. In the opinion of management, the financial statements and other information herein present fairly the
financial condition and operations of the Company at the dates indicated in conformity with accounting principles generally accepted in the
United States of America.
Management is responsible for establishing and maintaining an effective system of internal control over financial reporting. The internal
control system is augmented by written policies and procedures and by audits performed by an internal audit staff (assisted in certain
instances by contracted external audit resources other than the independent registered public accounting firm), which reports to the Audit
Committee of the Board of Directors. Internal auditors monitor the operation of the internal and external control system and report findings to
management and the Audit Committee. When appropriate, corrective actions are taken to address identified control deficiencies and other
opportunities for improving the system. The Audit Committee provides oversight to the financial reporting process. There are inherent
limitations in the effectiveness of any system of internal control, including the possibility of human error and circumvention or overriding of
controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time.
The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of the Company’s
management. The Audit Committee is responsible for the selection of the independent auditors. It meets periodically with management, the
independent auditors and the internal auditors to ensure that they are carrying out their responsibilities. The Committee is also responsible for
performing an oversight role by reviewing and monitoring the financial, accounting, and auditing procedures of the Company in addition to
reviewing the Company’s financial reports. The independent auditors and the internal auditors have full and free access to the Audit
Committee, with or without the presence of management, to discuss the adequacy of the internal control structure for financial reporting and
any other matters which they believe should be brought to the attention of the Committee.
Mark J. Grescovich, Chief Executive Officer
Peter J. Conner, Chief Financial Officer
78
Management Report on Internal Control over Financial Reporting
February 21, 2023
The management of Banner Corporation is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control system is designed to provide
reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over
financial reporting includes those policies and procedures that:
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
Company’s assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in
accordance with the authorizations of management and directors of the Company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, including the possibility of human error and circumvention or overriding of controls, internal control over
financial reporting may not prevent or detect misstatements. Also projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. This assessment
was based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control -
Integrated Framework (2013). Based on this assessment and those criteria, management believes that, as of December 31, 2022, the Company
maintained effective internal control over financial reporting.
The Company’s independent registered public accounting firm has audited the Company’s Consolidated Financial Statements that are
included in this annual report and the effectiveness of our internal control over financial reporting as of December 31, 2022 and issued their
Report of Independent Registered Public Accounting Firm, appearing under Item 8. The audit report expresses an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting as of December 31, 2022.
79
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Banner Corporation and Subsidiaries
Opinions on the Consolidated Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial condition of Banner Corporation and subsidiaries (the “Company”)
as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity
and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the
“consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2022,
based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial
position of the Company as of December 31, 2022 and 2021, and the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated
financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or
fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of
management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
80
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that
were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to
the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of
critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to
which they relate.
As described in Notes 1 and 4 to the consolidated financial statements, the balance of the Company’s consolidated allowance for credit losses
– loans was $141.5 million at December 31, 2022. The allowance for credit losses is a valuation account that is deducted from the amortized
cost basis of loans held for investments to present the net carrying value at the amount expected to be collected on such financial assets. The
measurement of expected credit losses is based on relevant information about past events, current conditions, and reasonable and supportable
forecasts. The allowance for credit losses – loans is maintained at a level sufficient to provide for expected credit losses over the life of the
loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific
risk characteristics in the current loan portfolio. These factors include, among others, changes in the size and composition of the loan
portfolio, differences in underwriting standards, delinquency rates, actual loss experience and current economic conditions. Management uses
economic indicators to adjust the historical loss rates so that they better reflect management’s expectations of future conditions over the
remaining lives of the loans in the portfolio based on reasonable and supportable forecasts. These economic indicators are selected based on
correlation to the Company’s historical credit loss experience and are evaluated for each loan category. Management also considers
qualitative and environmental factors for each loan category to adjust for differences between the historical periods used to calculate historical
loss rates and expected conditions over the remaining lives of the loans in the portfolio.
We identified the estimation and application of forecasted economic conditions used in the allowance for credit losses – loans as a critical
audit matter. The economic forecast component of the allowance for credit losses – loans is used to compare the conditions that existed
during the historical period to current conditions and future expectations, and to make adjustments to the historical data accordingly.
Auditing the estimation of forecasted economic conditions and the method by which management applied these forecasts to the allowance for
credit losses – loans involved especially challenging and subjective auditor judgment when performing audit procedures and evaluating the
results of those procedures.
The primary procedures we performed to address this critical audit matter included:
•
Testing the design, implementation, and operating effectiveness of controls relating to management’s calculation of the allowance for
credit losses – loans, including controls over the selection and implementation of the forecasted economic conditions used.
• Obtaining management’s analysis and supporting documentation related to the forecasted economic conditions, and testing whether the
forecasts used in the calculation of the allowance for credit losses are reasonable and supportable based on the analysis provided by
management.
Testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for credit losses, testing
completeness and accuracy of the data used in the calculation, testing application of the forecasted economic conditions determined by
management and used in the calculation, and recalculating the impact of the forecast on the allowance for credit losses – loans balance.
•
We identified the estimation of qualitative and environmental factors used in the allowance for credit losses – loans as a critical audit matter.
The qualitative and environmental factors are used to estimate credit losses related to matters that are not captured in the historical loss rates,
and are based on management’s evaluation of available internal and external data. Auditing management’s judgments regarding the
qualitative and environmental factors applied to the allowance for credit losses - loans involved especially challenging and subjective auditor
judgment when performing audit procedures and evaluating the results of those procedures.
The primary procedures we performed to address this critical audit matter included:
•
Testing the design, implementation, and operating effectiveness of controls relating to management’s calculation of the allowance for
credit losses, including controls over the determination of the qualitative and environmental factors used.
• Obtaining management’s analysis and supporting documentation related to the qualitative and environmental factors, and testing whether
the environmental and qualitative factors used in the calculation of the allowance for credit losses – loans are supported by the analysis
provided by management.
Testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for credit losses, testing
completeness and accuracy of the data used in the calculation, testing application of the environmental and qualitative factors determined
by management and used in the calculation, and recalculating the allowance for credit losses balance.
•
We identified management’s risk ratings of loans which are used in the allowance for credit losses – loans as a critical audit matter. The
Company uses internally determined risk ratings as credit indicators to classify loans into pools and to estimate expected loss rates for each of
the loan pools. Those loan pools are then included in the calculation of the allowance for credit losses – loans. Auditing management’s
judgments regarding risk ratings of loans involved especially challenging and subjective auditor judgment when performing audit procedures
and evaluating the results of those procedures.
81
The primary procedures we performed to address this critical audit matter included:
•
•
•
Testing the design, implementation, and operating effectiveness of controls over the accuracy of risk ratings of loans.
Testing a risk-based, targeted selection of loans to gain substantive evidence that the Company is appropriately rating these loans in
accordance with its policies, and that the risk ratings for the loans are reasonable.
Testing the completeness and accuracy of the loan data used in the allowance for credit losses calculation, including application of the
loan risk ratings determined by management and used in the calculation, and recalculating the allowance for credit losses – loans
balance.
/s/ Moss Adams LLP
Spokane, Washington
February 21, 2023
We have served as the Company’s auditor since 2004.
82
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except shares)
December 31, 2022 and 2021
ASSETS
Cash and due from banks
Interest-bearing deposits
Total cash and cash equivalents
Securities—trading
Securities—available-for-sale, amortized cost $3,218,777 and $3,653,160, respectively
Securities—held-to-maturity, net of allowance for credit losses of $379 and $433, respectively
Total securities
Federal Home Loan Bank (FHLB) stock
Securities purchased under agreements to resell
Loans held for sale (includes $51,779 and $39,775, at fair value, respectively)
Loans receivable
Allowance for credit losses – loans
Net loans receivable
Accrued interest receivable
Real estate owned (REO), held for sale, net
Property and equipment, net
Goodwill
Other intangibles, net
Bank-owned life insurance (BOLI)
Deferred tax assets, net
Operating lease right-of-use assets
Other assets
Total assets
LIABILITIES
Deposits:
Non-interest-bearing
Interest-bearing transaction and savings accounts
Interest-bearing certificates
Total deposits
Advances from FHLB
Other borrowings
Subordinated notes, net
Junior subordinated debentures at fair value (issued in connection with Trust Preferred Securities)
Operating lease liabilities
Accrued expenses and other liabilities
Deferred compensation
Total liabilities
$
$
December 31,
2022
December 31,
2021
$
198,154 $
44,908
243,062
28,694
2,789,031
1,117,588
3,935,313
12,000
300,000
56,857
10,146,724
(141,465)
10,005,259
57,284
340
138,754
373,121
9,440
297,565
178,131
49,283
177,022
15,833,431 $
358,461
1,775,839
2,134,300
26,981
3,638,993
520,922
4,186,896
12,000
300,000
96,487
9,084,763
(132,099)
8,952,664
42,916
852
148,759
373,121
14,855
244,156
71,138
55,257
171,471
16,804,872
6,176,998 $
6,719,531
723,530
13,620,059
50,000
232,799
98,947
74,857
55,205
200,839
44,293
14,376,999
6,385,177
7,103,125
838,631
14,326,933
50,000
264,490
98,564
119,815
59,756
148,303
46,684
15,114,545
COMMITMENTS AND CONTINGENCIES (Note 20)
SHAREHOLDERS’ EQUITY
Preferred stock - $0.01 par value per share, 500,000 shares authorized; no shares outstanding at December 31,
2022 and December 31, 2021
Common stock and paid in capital - $0.01 par value per share, 50,000,000 shares authorized; 34,194,018
shares issued and outstanding at December 31, 2022; 34,252,632 shares issued and outstanding at
December 31, 2021
Common stock (non-voting) and paid in capital - $0.01 par value per share, 5,000,000 shares authorized; no
shares issued and outstanding at December 31, 2022; no shares issued and outstanding at December 31,
2021
Retained earnings
Carrying value of shares held in trust for stock-based compensation plans
Liability for common stock issued to stock related compensation plans
Accumulated other comprehensive (loss) income
Total shareholders’ equity
Total liabilities and shareholders’ equity
See notes to consolidated financial statements
—
—
1,293,959
1,299,381
—
525,242
(6,905)
6,905
(362,769)
1,456,432
15,833,431 $
—
390,762
(7,435)
7,435
184
1,690,327
16,804,872
$
83
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for per share amounts)
For the Years Ended December 31, 2022, 2021 and 2020
2022
2021
2020
INTEREST INCOME:
Loans receivable
Mortgage-backed securities
Securities and cash equivalents
Total interest income
INTEREST EXPENSE:
Deposits
FHLB advances
Other borrowings
Subordinated debt
Total interest expense
Net interest income
PROVISION (RECAPTURE) FOR CREDIT LOSSES
Net interest income after provision (recapture) for credit losses
NON-INTEREST INCOME
Deposit fees and other service charges
Mortgage banking operations
BOLI
Miscellaneous
Net (loss) gain on sale of securities
Net change in valuation of financial instruments carried at fair value
Gain on sale of branches, including related deposits
Total non-interest income
NON-INTEREST EXPENSE:
Salary and employee benefits
Less capitalized loan origination costs
Occupancy and equipment
Information and computer data services
Payment and card processing services
Professional and legal expenses
Advertising and marketing
Deposit insurance
State and municipal business and use taxes
Real estate operations, net
Amortization of core deposit intangibles
Loss on extinguishment of debt
Miscellaneous
COVID-19 expenses
Merger and acquisition - related expenses
Total non-interest expense
Income before provision for income taxes
PROVISION FOR INCOME TAXES
NET INCOME
Earnings per common share:
Basic
Diluted
Cumulative dividends declared per common share
Weighted average number of common shares outstanding:
Basic
Diluted
$
450,916 $
67,585
54,068
572,569
445,731 $
45,723
29,046
520,500
10,124
489
377
8,400
19,390
553,179
10,364
542,815
44,459
10,834
7,794
6,805
69,892
(3,248)
807
7,804
75,255
242,266
(24,313)
52,018
25,986
21,195
14,005
3,959
6,649
4,693
(104)
5,279
793
24,869
377,295
—
—
377,295
240,775
45,397
195,378 $
5.70 $
5.67 $
1.76 $
11,770
2,592
467
8,780
23,609
496,891
(33,388)
530,279
39,495
33,948
5,000
12,875
91,318
482
4,616
—
96,416
244,351
(34,401)
52,850
24,356
20,544
22,274
6,036
5,583
4,343
(22)
6,571
2,284
24,236
379,005
436
660
380,101
246,594
45,546
201,048 $
5.81 $
5.76 $
1.64 $
$
$
$
$
466,360
31,792
20,994
519,146
25,015
5,023
603
7,204
37,845
481,301
67,875
413,426
34,384
51,083
5,972
6,821
98,260
1,012
(656)
—
98,616
245,400
(34,848)
53,362
24,386
16,095
12,093
6,412
6,516
4,355
(190)
7,732
—
22,712
364,025
3,502
2,062
369,589
142,453
26,525
115,928
3.29
3.26
1.23
34,264,322
34,459,922
34,610,056
34,919,188
35,264,252
35,528,848
See notes to the consolidated financial statements
84
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
For the Years Ended December 31, 2022, 2021 and 2020
NET INCOME
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF INCOME TAXES:
Unrealized holding (loss) gain on securities—available-for-sale arising during the
period
Income tax benefit (expense) related to securities—available-for-sale unrealized
holding losses
Reclassification for net loss (gain) on securities—available-for-sale realized in
earnings
Income tax (benefit) expense related to securities—available-for-sale realized
gains
Unrealized loss on securities transferred from available-for-sale to held-to-maturity
Income tax benefit related to securities transferred from available-for-sale to held-
to-maturity
Amortization of unrealized loss on securities transferred from available-for-sale to
held-to-maturity
Income tax benefit related to amortization of unrealized loss on securities
transferred from available-for-sale to held-to-maturity
Net unrealized loss on interest rate swaps used in cash flow hedges
Income tax benefit related to interest rate swaps used in cash flow hedges
Changes in fair value of junior subordinated debentures related to instrument
specific credit risk
Income tax benefit (expense) related to junior subordinated debentures
Reclassification of fair value of junior subordinated debentures redeemed
Income tax expense related to junior subordinated debentures redeemed
Other comprehensive (loss) income
COMPREHENSIVE (LOSS) INCOME
2022
2021
2020
$
195,378 $
201,048 $
115,928
(418,827)
(80,073)
100,518
19,217
3,248
(780)
(34,596)
8,303
2,625
(630)
(25,223)
6,054
(5,560)
1,334
765
(498)
120
—
—
—
—
(1,261)
302
(10,419)
2,501
1,613
(184)
(362,953)
(167,575) $
(387)
(68,885)
132,163 $
$
45,247
(10,860)
(454)
109
—
—
—
—
—
—
2,330
(559)
—
—
35,813
151,741
See notes to the consolidated financial statements
85
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S
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31, 2022, 2021 and 2020
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation
Deferred income and expense, net of amortization
Capitalized loan servicing rights, net of amortization
Amortization of core deposit intangibles
Loss (gain) on sale of securities, net
Net change in valuation of financial instruments carried at fair value
Reinvested dividends – equity securities
Gain on sale of branches, including related deposits
Decrease (increase) in deferred taxes
Increase (decrease) in current taxes payable
Stock-based compensation
Net change in cash surrender value of BOLI
Gain on sale of loans, excluding capitalized servicing rights
Loss (gain) on disposal of real estate held for sale and property and equipment, net
Provision (recapture) for credit losses
Provision for losses on real estate held for sale
Loss on extinguishment of debt
Origination of loans held for sale
Proceeds from sales of loans held for sale
Net change in:
Other assets
Other liabilities
Net cash provided from operating activities
INVESTING ACTIVITIES:
Purchases of securities—available-for-sale
Principal repayments and maturities of securities—available-for-sale
Proceeds from sales of securities—available-for-sale
Purchases of securities—held-to-maturity
Principal repayments and maturities of securities—held-to-maturity
Purchases of equity securities
Proceeds from sales of equity securities
Loan (originations) repayments, net
Purchases of loans and participating interest in loans
Proceeds from sales of other loans
Net cash paid related to branch divestiture
Purchases of property and equipment
Proceeds from sale of real estate held for sale and sale of other property
Proceeds from FHLB stock repurchase program
Purchase of FHLB stock
Purchase of securities purchased under agreements to resell
Investment in bank-owned life insurance
Other
Net cash used by investing activities
2022
2021
2020
$
195,378 $
201,048 $
115,928
16,933
(3,757)
1,326
5,279
3,248
(807)
—
(7,804)
7,624
8,250
8,870
(7,100)
(4,556)
102
10,364
—
765
(406,915)
415,635
(39,028)
34,244
238,051
(659,905)
368,996
214,335
(190,645)
56,056
—
—
(897,505)
(126,556)
14,034
(168,137)
(14,724)
6,088
15,080
(15,080)
—
(50,053)
3,459
(1,444,557)
17,345
(38,786)
(1,805)
6,571
(482)
(4,616)
—
—
16,357
(3,643)
9,258
(4,685)
(26,140)
(2,305)
(33,388)
—
2,284
(1,102,663)
1,276,111
2,200
(11,083)
301,578
(2,805,251)
1,314,484
83,663
(135,615)
32,487
(4,750)
4,796
795,892
(5,086)
46,028
—
(10,493)
11,759
4,358
—
(300,000)
(50,053)
2,355
(1,015,426)
18,130
(15,040)
(894)
7,732
(1,012)
656
(353)
—
(13,963)
(2,193)
9,168
(5,030)
(43,304)
859
67,875
45
—
(1,461,872)
1,471,828
(27,559)
4,385
125,386
(1,361,132)
474,876
150,374
(222,094)
33,848
(1,060,000)
1,060,695
(561,338)
(2,510)
19,469
—
(12,803)
8,893
52,169
(40,185)
—
(83)
5,197
(1,454,624)
(Continued on next page)
87
BANNER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued) (in thousands)
For the Years Ended December 31, 2022, 2021 and 2020
2022
FINANCING ACTIVITIES:
(Decrease) increase in deposits, net
Repayment of long term FHLB borrowing
Advances (repayments) of overnight and short-term FHLB borrowings, net
(Decrease) increase in other borrowings, net
Net proceeds from issuance of subordinated notes
Repayment of junior subordinated debentures
Proceeds from redemption of trust securities related to junior subordinated debentures
Cash dividends paid
Cash paid for repurchase of common stock
Taxes paid related to net share settlement for equity awards
Net cash (used by) provided from financing activities
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
(528,672)
(50,000)
50,000
(31,690)
—
(50,518)
1,518
(61,078)
(10,960)
(3,332)
(684,732)
(1,891,238)
2,134,300
$
243,062 $
2021
2020
1,759,638
(100,000)
—
79,704
—
(8,248)
248
(57,621)
(56,528)
(3,228)
1,613,965
900,117
1,234,183
2,134,300 $
2,518,654
—
(300,000)
66,311
98,027
—
—
(94,078)
(31,775)
(1,453)
2,255,686
926,448
307,735
1,234,183
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid in cash
Taxes paid
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Transfer of loans to real estate owned and other repossessed assets
Dividends accrued but not paid until after period end
Loans, held-for-sale, transferred to portfolio
Securities, available-for-sale, transferred to held-to-maturity
DISPOSITIONS:
Assets divested
Liabilities divested
2022
2021
2020
$
18,583 $
24,885
24,278 $
29,017
40,942
39,672
—
1,158
35,466
462,159
(1,539)
(178,209)
512
1,338
—
—
—
—
1,602
1,357
—
—
—
—
See notes to consolidated financial statements
88
BANNER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: Banner Corporation (Banner or the Company) is a bank holding company incorporated in the State of Washington. The
Company is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly-owned subsidiary,
Banner Bank (the Bank). The Bank is a Washington-chartered commercial bank that conducts business from its headquarters in Walla Walla,
Washington and, as of December 31, 2022, its 137 branch offices located in Washington, Oregon, California and Idaho. The Bank also has
18 loan production offices located in Washington, Oregon, California, Idaho and Utah. Banner is subject to regulation by the Board of
Governors of the Federal Reserve System (the Federal Reserve Board). The Bank is subject to regulation by the Washington State
Department of Financial Institutions, Division of Banks (the DFI) and the Federal Deposit Insurance Corporation (the FDIC).
Basis of Presentation and Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary. All material intercompany transactions, profits and balances have been eliminated. The consolidated financial
statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) and
under the rules and regulations of the U.S. Securities and Exchange Commission (the SEC). At December 31, 2022, the Company had five
wholly-owned subsidiary grantor trusts (the Trusts), each of which issued trust preferred securities (TPS) and common securities. The Trusts
are not consolidated in the Company’s consolidated financial statements.
Subsequent Events: The Company has evaluated events and transactions subsequent to December 31, 2022 through the date that the
consolidated financial statements were issued for potential recognition or disclosure.
Cash and Cash Equivalents: Cash and cash equivalents include cash and due from banks and temporary investments which are federal funds
sold and interest bearing balances due from other banks. Cash and cash equivalents generally have maturities of three months or less at the
date of purchase.
Business Combinations: Business combinations are accounted for using the acquisition method of accounting and, accordingly, assets
acquired and liabilities assumed, both tangible and intangible, and consideration exchanged are recorded at acquisition date fair values. The
excess purchase consideration over fair value of net assets acquired is recorded as goodwill. In the event that the fair value of net assets
acquired exceeds the purchase price, including fair value of liabilities assumed, a bargain purchase gain is recorded on that acquisition.
Expenses incurred in connection with a business combination are expensed as incurred, except for those items permitted to be capitalized.
Changes in deferred tax asset valuation allowances related to acquired tax uncertainties are recognized in net income after the measurement
period.
In the opinion of management, the accompanying Consolidated Statements of Financial Condition and related
Use of Estimates:
Consolidated Statements of Operations, Comprehensive Income, Changes in Shareholders’ Equity and Cash Flows reflect all adjustments
(which include reclassification and normal recurring adjustments) that are necessary for a fair presentation in conformity with GAAP. The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts
reported in the financial statements.
Various elements of the Company’s accounting policies, by their nature, are inherently subject to estimation techniques, valuation
assumptions and other subjective assessments.
In particular, management has identified several accounting policies that, due to the
judgments, estimates and assumptions inherent in those policies, are critical to an understanding of Banner’s consolidated financial
statements. These policies relate to (i) determination of the provision and allowance for credit losses, (ii) the valuation of financial assets and
liabilities recorded at fair value, (iii) the valuation of intangible assets, such as goodwill, (iv) the valuation or recognition of deferred tax
assets and liabilities and (v) the determination of estimated losses from legal proceedings and other contingent matters pending. Management
believes that the judgments, estimates and assumptions used in the preparation of the consolidated financial statements are appropriate based
on the factual circumstances at the time. However, given the sensitivity of the Consolidated Financial Statements to these critical accounting
estimates, the use of other judgments, estimates and assumptions could result in material differences in the Company’s results of operations or
financial condition. Further, subsequent changes in economic or market conditions could have a material impact on these estimates and the
Company’s financial condition and operating results in future periods.
Securities: Debt securities are classified as held-to-maturity when the Company has the ability and positive intent to hold them to
maturity. Debt securities classified as available-for-sale are available for future liquidity requirements and may be sold prior to
maturity. Debt securities classified as trading are also available for future liquidity requirements and may be sold prior to maturity. Purchase
premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Debt securities classified
as held-to-maturity are carried at cost, net of the allowance for credit losses - securities, adjusted for amortization of premiums to the earliest
callable date and accretion of discounts to maturity. Debt securities classified as available-for-sale are measured at fair value. Unrealized
holding gains and losses on debt securities classified as available-for-sale are excluded from earnings and are reported net of tax as
accumulated other comprehensive income (AOCI), a component of shareholders’ equity, until realized. Debt securities classified as trading
are also measured at fair value. Unrealized holding gains and losses on securities classified as trading are included in earnings. Realized
gains and losses on sale are computed on the specific identification method and are included in earnings on the trade date sold. Equity
securities are measured at fair value with changes in the fair value recognized through net income.
89
Allowance for Credit Losses - Securities: Management measures expected credit losses on held-to-maturity debt securities on a collective
basis by major security type. The Company’s held-to maturity portfolio contains mortgage-backed securities issued by U.S. government
entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating
agencies and have a long history of no credit losses. The Company’s held-to-maturity portfolio also contains municipal bonds that are
typically rated by major rating agencies as Aa or better. The Company has never incurred a loss on a municipal bond, therefore the
expectation of credit losses on these securities is insignificant. The Company uses industry historical credit loss information adjusted for
current conditions to establish the allowance for credit losses on the municipal bond portfolio. Less than 2% of the Company’s held-to-
maturity portfolio are community development bonds; approximately half represent pools of one- to four-family loans while the other half are
not collateralized. The expected credit losses on these bonds is similar to Banner’s commercial business loan portfolio. Therefore, the
Company uses the commercial business loan portfolio loss rates to establish the allowance for credit losses on the collateralized bonds and its
own loss history to establish a loss rate on bonds that are not collateralized.
For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or is more likely than
not that it will be required to sell the security before recovery of its amortized cost basis. If the Company intends to sell the security or it is
more likely than not that the Company will be required to sell the security before recovering its cost basis, the entire impairment loss would
be recognized in earnings. If the Company does not intend to sell the security and it is not more likely than not that the Company will be
required to sell the security, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In
making this assessment, management considers the extent to which fair value is less than amortized costs, any changes to the rating of the
security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a
credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the
security. Projected cash flows are discounted by the current effective interest rate. If the present value of cash flows expected to be collected
is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount
that the fair value is less than the amortized cost basis. The remaining impairment related to all other factors, the difference between the
present value of the cash flows expected to be collected and fair value, is recognized as a charge to AOCI.
Changes in the allowance for credit losses are recorded as provision for (or recapture of) credit losses. Losses are charged against the
allowance when management believes the non-collectability of an available-for-sale or held-to-maturity security is confirmed or when either
of the criteria regarding intent or requirement to sell is met.
Investment in FHLB Stock: FHLB stock does not have a readily determinable fair value. The Bank’s investment in FHLB stock is carried at
cost or par value ($100 per share) and evaluated for impairment based on the Bank’s expectations of the ultimate recoverability of the stock’s
par value. Ownership of FHLB stock is restricted to the FHLB and member institutions and can only be purchased and redeemed at par,
therefore there has been no observable changes in market prices. As a member of the FHLB system, the Bank is required to maintain a
minimum level of investment in FHLB stock based on specific percentages of its outstanding FHLB advances.
Management periodically evaluates FHLB stock for impairment. Management’s determination of whether these investments are impaired is
based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of
whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of
the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the
FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB,
(3) the impact of legislative and regulatory changes on institutions and, accordingly, the client base of the FHLB, and (4) the liquidity position
of the FHLB. The Company has determined there is no impairment on the FHLB stock investment as of December 31, 2022 and 2021.
Loans Receivable: The Bank originates residential one- to four-family and multifamily mortgage loans for both portfolio investment and sale
in the secondary market. The Bank also originates construction and land development, commercial real estate, commercial business,
agricultural and consumer loans for portfolio investment. Loans receivable not designated as held for sale are recorded at amortized cost, net
of the allowance for credit losses. Amortized cost is the principal amount outstanding, net of deferred fees, discounts and
premiums. Accrued interest on loans is reported in accrued interest receivable on the Consolidated Statements of Financial Condition.
Premiums, discounts and deferred loan fees are amortized to maturity using the level-yield methodology.
Loans Held for Sale: Residential one- to four-family and multifamily mortgage loans originated with the intent to be sold in the secondary
market are considered held for sale. Residential one- to four-family loans under best effort delivery commitments are carried at the lower of
aggregate cost or estimated market value. Residential one- to four-family loans expected to be delivered under mandatory commitments are
carried at fair value in order to match changes in the value of the loans with the value of the related economic hedges on the loans. Fair
values for residential mortgage loans held for sale are determined by comparing actual loan rates to current secondary market prices for
similar loans. The multifamily held for sale loans originated prior to April 1, 2020 were carried at fair value in order to match changes in the
value of the loans with the value of the related economic hedges on the loans. Fair values for multifamily loans held for sale are calculated
based on discounted cash flows using a discount rate that is a combination of market spreads for similar loan types added to selected index
rates. The multifamily held for sale loans originated subsequent to March 31, 2020 are carried at the lower of cost or market. Net unrealized
losses on loans held for sale that are carried at lower of cost or market are recognized through the valuation allowance as charges to
income. Non-refundable fees and direct loan origination costs related to loans held for sale carried at the lower of cost or market are
recognized as part of the cost basis of the loan. Gains and losses on sales of loans held for sale are determined using the aggregate method
and are recorded in the mortgage banking operations component of non-interest income. For the years ended December 31, 2022 and 2021,
we recorded net gains on loans sold of $7.8 million and $34.5 million, respectively.
90
Loans Acquired in Business Combinations: Loans acquired in business combinations are recorded at their fair value at the acquisition date.
Establishing the fair value of acquired loans involves a significant amount of judgment, including determining the credit discount based upon
historical data adjusted for current economic conditions and other factors. If any of these assumptions are inaccurate actual credit losses
could vary significantly from the credit discount used to calculate the fair value of the acquired loans. Acquired loans are evaluated upon
acquisition and classified as either purchased credit-deteriorated or purchased non-credit-deteriorated. Purchased credit-deteriorated (PCD)
loans have experienced more than insignificant credit deterioration since origination. For PCD loans, an allowance for credit losses is
determined at the acquisition date using the same methodology as other loans held for investment. The initial allowance for credit losses
determined on a collective basis is allocated to individual loans. The loan’s fair value is grossed up for the allowance for credit losses and
becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit
discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses
are recorded through a provision for credit losses.
For purchased non-credit-deteriorated loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition
date is amortized or accreted to interest income over the life of the loan. While credit discounts are included in the determination of the fair
value for non-credit-deteriorated loans, since these discounts are expected to be accreted over the life of the loans, they cannot be used to
offset the allowance for credit losses that must be recorded at the acquisition date. As a result, an allowance for credit losses is determined at
the acquisition date using the same methodology as other loans held for investment and is recognized as a provision for credit losses. Any
subsequent deterioration (improvement) in credit quality is recognized by recording (recapturing) a provision for credit losses.
Income Recognition on Nonaccrual Loans and Securities: Interest on loans and securities is accrued as earned unless management doubts
the collectability of the asset or the unpaid interest. Interest accruals on loans are generally discontinued when loans become 90 days past due
for payment of interest or principal and the loans are then placed on nonaccrual status. All previously accrued but uncollected interest is
deducted from interest income upon transfer to nonaccrual status. For any future payments collected, interest income is recognized only upon
management’s assessment that there is a strong likelihood that the full amount of a loan will be repaid or recovered. Management’s
assessment of the likelihood of full repayment involves judgment including determining the fair value of the underlying collateral which can
be impacted by the economic environment. A loan may be put on nonaccrual status sooner than this policy would dictate if, in management’s
judgment, the amounts owed, principal or interest may be uncollectable. While less common, similar interest reversal and nonaccrual
treatment is applied to investment securities if their ultimate collectability becomes questionable. Loans modified due to the COVID-19
pandemic are considered current if they are less than 30 days past due on the contractual payments at the time the loan modification program
was put in place and therefore continue to accrue interest unless the interest is being waived.
Provision and Allowance for Credit Losses - Loans: The methodology for determining the allowance for credit losses - loans is considered a
critical accounting estimate by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and
the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for credit losses -
loans. Among the material estimates required to establish the allowance for credit losses - loans are: a reasonable and supportable forecast; a
reasonable and supportable forecast period and reversion period; value of collateral; strength of guarantors; the amount and timing of future
cash flows for loans individually evaluated; and determination of the qualitative loss factors. All of these estimates are susceptible to
significant change. The allowance for credit losses - loans is a valuation account that is deducted from the amortized cost basis of loans to
present the net amount expected to be collected on the loans. The Bank has elected to exclude accrued interest receivable from the amortized
cost basis in their estimate of the allowance for credit losses - loans. The provision for credit losses reflects the amount required to maintain
the allowance for credit losses - loans at an appropriate level based upon management’s evaluation of the adequacy of collective and
individual loss reserves. The Company has established systematic methodologies for the determination of the adequacy of the Company’s
allowance for credit losses - loans. The methodologies are set forth in a formal policy and take into consideration the need for a valuation
allowance for loans evaluated on a collective (pool) basis which have similar risk characteristics as well as allowances that are tied to
individual loans that do not share risk characteristics.
The Company increases its allowance for credit losses - loans by charging the provision for credit losses. Losses related to specific assets are
applied as a reduction of the carrying value of the assets and charged against the allowance for credit loss reserve when management believes
the uncollectibility of a loan balance is confirmed. Recoveries on previously charged off loans are credited to the allowance for credit losses -
loans.
Management estimates the allowance for credit losses - loans using relevant information, from internal and external sources, relating to past
events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses - loans is maintained at a level sufficient
to provide for expected credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to
historical loss information for differences in the specific risk characteristics in the current loan portfolio. These factors include, among others,
changes in the size and composition of the loan portfolio, differences in underwriting standards, delinquency rates, actual loss experience and
current economic conditions.
The allowance for credit losses - loans is measured on a collective (pool) basis when similar risk characteristics exist. In estimating the
component of the allowance for credit losses for loans that share common risk characteristics, loans are pooled based on loan type and areas
of risk concentration. For loans evaluated collectively, the allowance for credit losses is calculated using life of loan historical losses adjusted
for economic forecasts and current conditions.
91
For commercial real estate, multifamily real estate, construction and land, commercial business and agricultural loans with risk rating
segmentation, historical credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and risk rating.
For one- to four- family residential loans, consumer loans, home equity lines of credit, small business loans, and small balance commercial
real estate loans, historical credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and delinquency
status. These models calculate an expected life-of-loan loss percentage for each loan category by calculating the probability of default, based
on the migration of loans from performing to loss by risk rating or delinquency categories using historical life-of-loan analysis and the
severity of loss, based on the aggregate net lifetime losses incurred for each loan pool. For credit cards, historical credit loss assumptions are
estimated using a model that calculates an expected life-of-loan loss percentage for each loan category by considering the historical
cumulative losses based on the aggregate net lifetime losses incurred for each loan pool.
For loans evaluated collectively, management uses economic indicators to adjust the historical loss rates so that they better reflect
management’s expectations of future conditions over the remaining lives of the loans in the portfolio based on reasonable and supportable
forecasts. These economic indicators are selected based on correlation to the Company’s historical credit loss experience and are evaluated
for each loan category. The economic indicators evaluated include the unemployment rate, gross domestic product, real estate price indices
and growth, industrial employment, corporate profits, the household consumer debt service ratio, the household mortgage debt service ratio,
and single family median home price growth. Management considers various economic scenarios and forecasts when evaluating the
economic indicators and weighs the probability of various scenarios to arrive at the forecast that most reflects management’s expectations of
future conditions. The allowance for credit losses is then adjusted for the period in which those forecasts are considered to be reasonable and
supportable. To the extent the lives of the loans in the portfolio extend beyond the period for which a reasonable and supportable forecast can
be made, the adjustments discontinue to be applied so that the model reverts back to the historical loss rates using a straight line reversion
method. Management selected a reasonable and supportable forecast period of 12 months with a reversion period of 12 months. Both the
reasonable and supportable forecast period and the reversion period are periodically reviewed by management.
Further, for loans evaluated collectively, management also considers qualitative and environmental factors for each loan category to adjust for
differences between the historical periods used to calculate historical loss rates and expected conditions over the remaining lives of the loans
in the portfolio. In determining the aggregate adjustment needed, management considers the financial condition of the borrowers, the nature
and volume of the loans, the remaining terms and the extent of prepayments on the loans, the volume and severity of past due and classified
loans as well as the value of the underlying collateral on loans in which the collateral dependent practical expedient has not been used.
Management also considers the Company’s lending policies, the quality of the Company’s credit review system, the quality of the Company’s
management and lending staff, and the regulatory and economic environments in the areas in which the Company’s lending activities are
concentrated.
Loans that do not share risk characteristics with other loans in the portfolio are individually evaluated for impairment and are not included in
the collective evaluation. Factors involved in determining whether a loan should be individually evaluated include, but are not limited to, the
financial condition of the borrower and the value of the underlying collateral. Expected credit losses for loans evaluated individually are
measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or when the Bank
determines that foreclosure is probable, the expected credit loss is measured based on the fair value of the collateral as of the reporting date,
less estimated selling costs, as applicable. As a practical expedient, the Bank measures the expected credit loss for a loan using the fair value
of the collateral, if repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is
experiencing financial difficulty based on the Bank’s assessment as of the reporting date.
In both cases, if the fair value of the collateral is less than the amortized cost basis of the loan, the Bank will recognize an allowance as the
difference between the fair value of the collateral, less costs to sell (if applicable) at the reporting date and the amortized cost basis of the
loan. If the fair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis
will be limited to the amount previously charged-off. Subsequent changes in the expected credit losses for loans evaluated individually are
included within the provision for credit losses in the same manner in which the expected credit loss initially was recognized or as a reduction
in the provision that would otherwise be reported.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The
contractual term excludes expected extensions, renewals, and modifications unless either management has a reasonable expectation at the
reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included
in the original or modified contract at the reporting date and are not unconditionally cancellable by the Bank.
Some of the Bank’s loans are reported as troubled debt restructures (TDRs). Loans are reported as TDRs when the Bank grants a concession
to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include forgiveness of
principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for a
transaction of similar risk. The allowance for credit losses on a TDR is determined using the same method as all other loans held for
investment, except when the value of the concession cannot be measured using a method other than the discounted cash flow method. When
the value of a concession is measured using the discounted cash flow method the allowance for credit losses is determined by discounting the
expected future cash flows at the original interest rate of the loan.
92
Loan Origination and Commitment Fees: Loan origination fees, net of certain specifically defined direct loan origination costs, are deferred
and recognized as an adjustment of the loans’ interest yield using the level-yield method over the contractual term of each loan adjusted for
actual loan prepayment experience. Loan commitment fees are deferred until the expiration of the commitment period unless management
believes there is a remote likelihood that the underlying commitment will be exercised, in which case the fees are amortized to fee income
using the straight-line method over the commitment period. If a loan commitment is exercised, the deferred commitment fee is accounted for
in the same manner as a loan origination fee. Deferred commitment fees associated with expired commitments are recognized as fee income.
Allowance for Credit Losses - unfunded loan commitments: An allowance for credit losses - unfunded loan commitments is maintained at a
level that, in the opinion of management, is adequate to absorb expected credit losses associated with the contractual life of the Bank’s
commitments to lend funds under existing agreements such as letters or lines of credit. The Bank uses a methodology for determining the
allowance for credit losses - unfunded loan commitments that applies the same segmentation and loss rate to each pool as the funded exposure
adjusted for probability of funding. Draws on unfunded loan commitments that are considered uncollectible at the time funds are advanced
are charged to the allowance for credit losses on off-balance sheet exposures. Changes in the allowance for credit losses - unfunded loan
commitments are recognized as provision for (or recapture of) credit loss expense and added to the allowance for credit losses - unfunded loan
commitments, which is included in other liabilities in the Consolidated Statements of Financial Condition.
Real Estate Owned: Property acquired by foreclosure or deed in lieu of foreclosure is recorded at the estimated fair value of the property,
less expected selling costs. Development and improvement costs relating to the property may be capitalized, while other holding costs are
expensed. The carrying value of the property is periodically evaluated by management and, if necessary, allowances are established to reduce
the carrying value to net realizable value. Gains or losses at the time the property is sold are charged or credited to operations in the period in
which they are realized. The amounts the Bank will ultimately recover from real estate held for sale may differ substantially from the
carrying value of the assets because of market factors beyond the Bank’s control or because of changes in the Bank’s strategies for recovering
the investment.
Property and Equipment: Property and equipment is carried at cost less accumulated depreciation. Depreciation is based upon the straight-
line method applied to individual assets and groups of assets acquired in the same year over the lesser of their estimated useful lives or the
related lease terms of the assets:
Buildings and leased improvements
Furniture and equipment
10–39 years
3–10 years
Routine maintenance, repairs and replacement costs are expensed as incurred. Expenditures which significantly increase values or extend
useful lives are capitalized. The Company reviews buildings, leasehold improvements and equipment for impairment whenever events or
changes in circumstances indicate that the undiscounted cash flows for the property are less than its carrying value. If identified, an
impairment loss is recognized through a charge to earnings based on the fair value of the property.
Property is classified as held for sale when the Company commits to a plan to sell the property and is actively marketing the property for sale.
Held for sale property is recorded at the lower of the estimated fair value of the property, less expected selling costs, or the book value at the
date the property is transferred to held for sale. Depreciation is not recorded on held for sale property.
Leases: The Company leases retail space, office space, storage space, and equipment under operating leases. Most leases require the
Company to pay real estate taxes, maintenance, insurance and other similar costs in addition to the base rent. Certain leases also contain lease
incentives, such as tenant improvement allowances and rent abatement. Variable lease payments are recognized as lease expense as they are
incurred. We record an operating lease right of use (ROU) asset and an operating lease liability (lease liability) for operating leases with a
lease term greater than 12 months.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease
payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the present value of lease
payments over the lease term. Accordingly, ROU assets are reduced by tenant improvement allowances from landlords plus any prepaid rent.
We do not separate lease and non-lease components of contracts. As most of our leases do not provide an implicit rate, we generally use our
incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at
commencement date. Many of our leases contain various provisions for increases in rental rates, based either on changes in the published
Consumer Price Index or a predetermined escalation schedule, which are factored into our determination of lease payments when appropriate.
Substantially all of the leases provide the Company with the option to extend the lease term one or more times following expiration of the
initial term. The ROU asset and lease liability terms may include options to extend or terminate the lease when it is reasonably certain that
we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
93
Goodwill: Goodwill represents the excess of the purchase consideration paid over the fair value of the assets acquired, net of the fair values
of liabilities assumed in a business combination and is not amortized but is reviewed annually, or more frequently as current circumstances
and conditions warrant, for impairment. The Company completes its annual review of goodwill as of December 31. An assessment of
qualitative factors is completed to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
The qualitative assessment involves judgment by management on determining whether there have been any triggering events that have
occurred which would indicate potential impairment. If the qualitative analysis concludes that further analysis is required, then a quantitative
impairment test would be completed. The quantitative goodwill impairment test is used to identify the existence of impairment and the
amount of impairment loss and compares the reporting unit’s estimated fair values, including goodwill, to its carrying amount. If the fair
value exceeds the carrying amount then goodwill is not considered impaired. If the carrying amount exceeds its fair value, an impairment loss
would be recognized equal to the amount of excess, limited to the amount of total goodwill allocated to the reporting unit. The impairment
loss would be recognized as a charge to earnings. The disposal of a portion of a reporting unit that meets the definition of a business requires
goodwill to be allocated for purposes of determining the gain or loss on disposal.
Other Intangible Assets: Other intangible assets consist primarily of core deposit intangibles (CDI), which are amounts recorded in business
combinations or deposit purchase transactions related to the value of transaction-related deposits and the value of the client relationships
associated with the deposits. CDI is being amortized on an accelerated basis over a weighted average estimated useful life of eight years to
ten years. These assets are reviewed at least annually for events or circumstances that could impact their recoverability. These events could
include loss of the underlying core deposits, increased competition or adverse changes in the economy. To the extent other identifiable
intangible assets are deemed unrecoverable, impairment losses are recorded in other non-interest expense to reduce the carrying amount of the
assets.
Mortgage and Small Business Administration (SBA) Servicing Rights: Servicing assets are recognized as separate assets when rights are
acquired through purchase or sale of loans. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of
mortgage and SBA loans, the fair value of the servicing right is estimated and capitalized. Fair values are estimated based on an independent
dealer analysis of discounted cash flows. Capitalized mortgage servicing rights are reported in other assets and are amortized into mortgage
banking operations in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.
Capitalized SBA servicing rights are reported in other assets and are carried at fair value. Changes in the fair value of SBA servicing rights
are recognized into miscellaneous non-interest income.
Mortgage servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is
determined by stratifying rights into tranches based on predominant risk characteristics for the underlying loans, such as interest rate, balance
outstanding, loan type, age and remaining term, and investor type. Impairment is recognized through a valuation allowance for an individual
tranche, to the extent that fair value is less than the capitalized amount for the tranche. If the Company later determines that all or a portion of
the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income.
Servicing fee income is recorded for fees earned for servicing loans. Servicing fee income is reflected in mortgage banking operations for
mortgage servicing rights and in miscellaneous non-interest income for SBA servicing rights on the Consolidated Statements of
Operations. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as
income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.
Bank-Owned Life Insurance: The Bank has purchased, or acquired through mergers, life insurance policies in connection with the
implementation of certain executive supplemental income, salary continuation and deferred compensation retirement plans. These policies
provide protection against the adverse financial effects that could result from the death of a key employee and provide tax-exempt income to
offset expenses associated with the plans. It is the Bank’s intent to hold these policies as a long-term investment; however, there may be an
income tax impact if the Bank chooses to surrender certain policies. Although the lives of individual current or former management-level
employees are insured, the Bank is the respective owner and sole or partial beneficiary. BOLI is carried at the cash surrender value (CSV) of
the underlying insurance contract. Changes in the CSV and any death benefits received in excess of the CSV are recognized as non-interest
income.
Derivative Instruments: Derivatives include “off-balance-sheet” financial products, the value of which is dependent on the value of
underlying financial assets, such as stock, bonds, foreign currency, or a reference rate or index. Such derivatives include “forwards,”
“futures,” “options” or “swaps.” The Bank uses an interest rate swap program which involves the receipt of fixed-rate amounts from a
counterparty in exchange for variable-rate payments over the life of the agreements without exchange of the underlying notional amount.
Such derivatives are used to hedge the variable cash flows associated with existing variable-rate assets. These interest rate swaps qualify as
cash flow hedging instruments so gains and losses are recorded in AOCI to the extent the hedge is effective. Gains and losses on the interest
rate swaps are reclassified from AOCI to earnings in the period the hedged transaction affects earnings and are included in interest income.
Amounts reported in AOCI related to derivatives will be reclassified to interest income as interest payments are received on the Company’s
variable-rate assets. The Bank is a party to $400.0 million in notional amounts of these types of interest rate swaps at December 31, 2022.
In addition, the Bank uses an interest rate swap program for commercial loan clients that provides the client with a variable rate loan and
enters into an interest rate swap allowing them to effectively fix their loan interest rates. These client swaps are matched with third party
swaps with qualified broker/dealer or banks to offset the risk. At December 31, 2022, the Bank had $440.7 million in notional amounts of
these client interest rate swaps outstanding, with an equal amount of offsetting third party swaps also in place. The fair value adjustments for
these swaps are reflected in other assets or other liabilities as appropriate.
94
Further, as a part of its mortgage banking activities, the Company issues “rate lock” commitments to one- to four-family loan borrowers and
obtains offsetting “best efforts” delivery commitments from purchasers of loans. The Company uses forward contracts for the sale of
mortgage-backed securities and mandatory delivery commitments for the sale of loans to hedge one- to four-family loan “rate lock”
commitments and one- to four-family loans held for sale. The commitments to originate mortgage loans held for sale and the related delivery
contracts are considered derivatives. The Company recognizes all derivatives as either assets or liabilities in the balance sheet and requires
measurement of those instruments at fair value through adjustments to current earnings. None of these residential mortgage loan related
derivatives are designated as hedging instruments for accounting purposes. Rather, they are accounted for as free-standing derivatives, or
economic hedges, and the Company reports changes in fair values of its derivatives in current period net income. The fair values for these
instruments, which generally change as a result of changes in the level of market interest rates, are estimated based on dealer quotes and
secondary market sources. Assumptions used include rate assumptions based on historical information, current mortgage interest rates, the
stage of completion of the underlying application and underwriting process, the time remaining until the expiration of the derivative loan
commitment, and the expected net future cash flows related to the associated servicing of the loan.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been
surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the
transferee has the right to pledge or exchange the transferred assets beyond a trivial benefit, and (3) the Bank does not maintain effective
control over the transferred assets through an agreement to repurchase them before their maturity.
Advertising Expenses: Advertising costs are expensed as incurred. Costs related to production of advertising are considered incurred when
the advertising is first used.
Income Taxes: The Company files a consolidated income tax return including all of its wholly-owned subsidiaries on a calendar year
basis. Income taxes are accounted for using the asset and liability method. Under this method, a deferred tax asset or liability is determined
based on the enacted tax rates which are expected to be in effect when the differences between the financial statement carrying amounts and
tax basis of existing assets and liabilities are expected to be reported in the Company’s income tax returns. The effect on deferred taxes of a
change in tax rates is recognized in income in the period of change. A valuation allowance is recognized as a reduction to deferred tax assets
when management determines it is more likely than not that deferred tax assets will not be available to offset future income tax liabilities.
Accounting standards for income taxes prescribe a recognition threshold and measurement process for financial statement recognition and
measurement of uncertain tax positions taken or expected to be taken in a tax return, and also provides guidance on the de-recognition of
previously recorded benefits and their classification, as well as the proper recording of interest and penalties, accounting in interim periods,
disclosures and transition. The Company periodically reviews its income tax positions based on tax laws and regulations and financial
reporting considerations, and records adjustments as appropriate. This review takes into consideration the status of current taxing authorities’
examinations of the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax
environment.
Stock-Based Compensation: The Company maintains a number of stock-based incentive plans, which are discussed in more detail in
Note 13, Stock-Based Compensation Plans. Under these plans, the Company compensates employees and directors with time-based restricted
stock and restricted stock unit grants. Some restricted stock awards include performance-based and market-based goals that impact the
number of shares that ultimately vest based on the level of goal achievement. The Company measures the cost of employee or director
services received in exchange for an award of equity instruments based on the fair value of the award, which is the intrinsic value on the grant
date. This cost is recognized as expense in the Consolidated Statements of Operations ratably over the vesting period of the award. Any tax
benefit or deficiency is recorded as income tax benefit or expense in the period the shares vest. Excess tax benefits are classified along with
other income tax cash flows as an operating activity. The Company issues restricted stock and restricted stock unit awards which vest over a
one or three year period during which time the employee or director accrues or receives dividends and may have full voting rights depending
on the terms of the grant.
Earnings Per Share: Earnings per common share is computed under the two-class method. Pursuant to the two-class method, non-vested
stock-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and are
included in the computation of EPS. The two-class method is an earnings allocation formula that determines earnings per share for each class
of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed
earnings. Application of the two-class method resulted in the equivalent earnings per share to the treasury method.
Basic earnings per common share is computed by dividing net earnings allocated to common shareholders by the weighted-average number of
common shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per common share
is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive
effect of stock compensation using the treasury stock method.
Comprehensive Income: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net
income. In addition, certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, unrealized
gains and losses on interest rate swaps used in cash flow hedges and changes in fair value of junior subordinated debentures related to
instrument specific credit risk, are reported as a separate component of the equity section of the Consolidated Statements of Financial
Condition, and such items, along with net income, are components of comprehensive income which is reported in the Consolidated
Statements of Comprehensive Income.
95
Business Segments: The Company is managed by legal entity and not by lines of business. The Bank is a community oriented commercial
bank chartered in the State of Washington. The Bank’s primary business is that of a traditional banking institution, gathering deposits and
originating loans for portfolio in its respective primary market areas. The Bank offers a wide variety of deposit products to its consumer and
commercial clients. Lending activities include the origination of real estate, commercial/agriculture business and consumer loans. The Bank
is also an active participant in the secondary market, originating residential loans for sale on both a servicing released and servicing retained
basis. In addition to interest income on loans and investment securities, the Bank receives other income from deposit service charges, loan
servicing fees and from the sale of loans and investments. The performance of the Bank is reviewed by the Company’s executive
management and Board of Directors on a monthly basis. All of the executive officers of the Company are members of the Bank’s
management team. The Company has determined that its current business and operations consist of a single business segment and a single
reporting unit.
Reclassification: Certain reclassifications have been made to the prior years’ consolidated financial statements and/or schedules to conform
to the current year’s presentation. These reclassifications may have an impact on certain reported amounts and ratios for the prior
periods. These reclassifications had no effect on retained earnings or net income as previously presented and the effect of these
reclassifications is considered immaterial.
Note 2: ACCOUNTING STANDARDS RECENTLY ISSUED OR ADOPTED
Reference Rate Reform (Topic 848)
In March 2020, the Financial Accounting Standards Board (FASB) issued guidance within Accounting Standards Update (ASU) 2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, in response to the scheduled
discontinuation of LIBOR on December 31, 2021. The amendments in this ASU provide optional guidance designed to provide relief from
the accounting analysis and impacts that may otherwise be required for modifications to agreements (e.g., loans, debt securities, derivatives,
borrowings) necessitated by reference rate reform. Since the issuance of this guidance, the publication cessation of U.S. dollar LIBOR has
been extended to June 30, 2023.
In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of Sunset Date of Topic 848. This ASU
defers the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply
the relief in Topic 848. This deferral of the sunset date is in response to the extension of the publication cessation date to June 30, 2023 noted
above which was beyond the current sunset date of December 31, 2022. The amendments in this ASU are effective upon the issuance date of
December 2022.
The following optional expedients for applying the requirements of certain Topics or Industry Subtopics in the Codification are permitted for
contracts that are modified because of reference rate reform and that meet certain scope guidance: 1) modifications of contracts within the
scope of Topics 310, Receivables, and 470, Debt, should be accounted for by prospectively adjusting the effective interest rate; 2)
modifications of contracts within the scope of Topic 842, Leases, should be accounted for as a continuation of the existing contracts with no
reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required under
this Topic for modifications not accounted for as separate contracts; 3) modifications of contracts do not require an entity to reassess its
original conclusion about whether that contract contains an embedded derivative that is clearly and closely related to the economic
characteristics and risks of the host contract under Subtopic 815-15, Derivatives and Hedging- Embedded Derivatives; and 4) for other Topics
or Industry Subtopics in the Codification, the amendments in this ASU also include a general principle that permits an entity to consider
contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or
reassessment of a previous accounting determination.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. This ASU clarifies that certain optional
expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the
discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the
scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. The amendments in this
ASUs are effective upon the issuance date of March 12, 2020, and applies to contract modifications made and new hedging relationships
entered into through December 31, 2022.
The Company has elected certain expedients related to individual hedge relationships. The Company will be able to use other expedients in
the Reference Rate Reform guidance to manage through the transition from LIBOR, specifically as they relate to loans, leases and hedging
relationships. The adoption of this accounting guidance did not have a material impact on the Company’s Consolidated Financial Statements.
Financial Instruments – Credit Losses (Topic 326)
In March 2022, the FASB issued guidance within ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt
Restructurings and Vintage Disclosures. The amendments in this ASU eliminate the current troubled debt restructuring (TDR) recognition
and measurement guidance and, instead, require that a creditor evaluate (consistent with the accounting for other loan modifications) whether
the modification represents a new loan or a continuation of an existing loan. The amendments also introduce new requirements related to
certain modifications of receivables made to borrowers experiencing financial difficulty.
96
These amendments require vintage disclosures including current-period gross write-offs by year of origination for financing receivables.
Gross write-off information must be included in the vintage disclosures in accordance with ASC 326-20-50-6, which requires disclosure of
the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination.
The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal
years, as the Company previously adopted the amendments in ASU 2016-13, which is commonly referred to as the current expected credit
loss methodology, on January 1, 2020. These amendments should be applied prospectively, though for the transition method related to the
recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-
effect adjustment to retained earnings in the period of adoption. The adoption of this ASU is not expected to have a material impact on the
Company’s Consolidated Financial Statements.
Fair Value Measurement (Topic 820)
In June 2022, the FASB issued guidance within ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity
Securities Subject to Contractual Sale Restrictions. The amendments in this ASU affect all entities that have investments in equity securities
measured at fair value that are subject to a contractual sale restriction. These amendments clarify that a contractual restriction on the sale of
an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.
The amendments in this ASU are effective for fiscal years, beginning after December 15, 2023, including interim periods within those fiscal
years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for
issuance. The adoption of this ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.
97
Note 3: SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair value of securities at December 31, 2022 and December 31, 2021 are
summarized as follows (in thousands):
Trading:
Corporate bonds
Available-for-Sale:
U.S. Government and agency obligations
Municipal bonds
Corporate bonds
Mortgage-backed or related securities
Asset-backed securities
Held-to-Maturity:
U.S. Government and agency obligations
Municipal bonds
Corporate bonds
Mortgage-backed or related securities
Trading:
Corporate bonds
Available-for-Sale:
U.S. Government and agency obligations
Municipal bonds
Corporate bonds
Mortgage-backed or related securities
Asset-backed securities
December 31, 2022
Amortized Cost
Fair Value
$
$
27,203 $
27,203 $
28,694
28,694
December 31, 2022
Gross
Unrealized
Losses
Gross
Unrealized
Gains
Allowance
for Credit
Losses
Amortized
Cost
Fair Value
$
56,344 $
301,449
133,334
2,505,172
222,478
$ 3,218,777 $
8 $
530
—
885
40
1,463 $
(1,244) $
(40,770)
(11,481)
(366,721)
(10,993)
(431,209) $
55,108
— $
261,209
—
121,853
—
2,139,336
—
—
211,525
— $ 2,789,031
December 31, 2022
Gross
Unrealized
Losses
Gross
Unrealized
Gains
Fair Value
Allowance
for Credit
Losses
Amortized
Cost
$
312 $
503,117
2,961
611,577
$ 1,117,967 $
— $
109
—
—
109 $
(7) $
(70,907)
(16)
(104,966)
(175,896) $
305 $
432,319
2,945
506,611
942,180 $
—
(183)
(196)
—
(379)
December 31, 2021
Amortized Cost
Fair Value
$
$
27,203 $
27,203 $
26,981
26,981
Gross
Unrealized
Gains
December 31, 2021
Gross
Unrealized
Losses
Allowance
for Credit
Losses
Amortized
Cost
Fair Value
$
201,101 $
293,761
114,427
2,837,480
206,391
$ 3,653,160 $
852 $
15,171
3,103
17,749
52
36,927 $
(621) $
(320)
(183)
(49,961)
(9)
(51,094) $
— $
201,332
—
308,612
—
117,347
—
2,805,268
—
206,434
— $ 3,638,993
98
Held-to-Maturity:
U.S. Government and agency obligations
Municipal bonds
Corporate bonds
Mortgage-backed or related securities
Gross
Unrealized
Gains
December 31, 2021
Gross
Unrealized
Losses
Fair Value
Allowance
for Credit
Losses
Amortized
Cost
$
$
316 $
420,555
3,092
97,392
521,355 $
3 $
20,743
—
1,171
21,917 $
— $
(1,393)
(3)
(23)
(1,419) $
319 $
439,905
3,089
98,540
541,853 $
—
(203)
(230)
—
(433)
Accrued interest receivable on held-to-maturity debt securities was $4.8 million and $3.3 million as of December 31, 2022 and December 31,
2021, and was $12.4 million and $10.1 million on available-for-sale debt securities at December 31, 2022 and December 31, 2021,
respectively. Accrued interest receivable on securities is reported in accrued interest receivable on the Consolidated Statements of Financial
Condition and is excluded from the calculation of the allowance for credit losses.
At December 31, 2022 and December 31, 2021, the gross unrealized losses and the fair value for securities available-for-sale aggregated
by the length of time that individual securities have been in a continuous unrealized loss position were as follows (in thousands):
Less Than 12 Months
Fair Value
Unrealized
Losses
December 31, 2022
12 Months or More
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Available-for-Sale:
U.S. Government and agency obligations
Municipal bonds
Corporate bonds
Mortgage-backed or related securities
Asset-backed securities
Available-for-Sale:
U.S. Government and agency obligations
Municipal bonds
Corporate bonds
Mortgage-backed or related securities
Asset-backed securities
$
(882) $
33,407 $
188,920
108,187
930,566
201,437
(1,244)
(40,770)
(11,481)
(366,721)
(10,993)
$ 1,462,517 $ (137,551) $ 1,222,815 $ (293,658) $ 2,685,332 $ (431,209)
50,139 $
222,827
121,253
2,089,676
201,437
16,732 $
33,907
13,066
1,159,110
—
(15,178)
(1,934)
(276,184)
—
(25,592)
(9,547)
(90,537)
(10,993)
(362) $
Less Than 12 Months
Fair Value
Unrealized
Losses
December 31, 2021
12 Months or More
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
— $
40,397
8,009
1,307,411
3,382
$ 1,359,199 $
— $
(221)
(121)
(38,028)
(9)
71,306 $
8,541
9,938
721,454
—
(38,379) $ 811,239 $
(621) $
(99)
(62)
(11,933)
—
71,306 $
48,938
17,947
2,028,865
3,382
(12,715) $ 2,170,438 $
(621)
(320)
(183)
(49,961)
(9)
(51,094)
At December 31, 2022, there were 298 securities—available-for-sale with unrealized losses, compared to 97 at December 31,
2021. Management does not believe that any individual unrealized loss as of December 31, 2022 or December 31, 2021 resulted from credit
loss. The decline in fair market value of these securities was generally due to changes in interest rates and changes in market-desired spreads
subsequent to their purchase.
There were no sales of securities—trading for the years ended December 31, 2022, 2021 or 2020. There were no securities—trading in a
nonaccrual status at December 31, 2022 or December 31, 2021. Net unrealized holding gains of $1.7 million were recognized in 2022 and net
unrealized holding gains of $2.0 million were recognized 2021.
99
The following table presents gross gains and losses on sales and partial calls of securities available-for-sale (in thousands):
For the Year Ended December 31,
2021
2020
2022
Available-for-Sale:
Gross Gains
Gross Losses
Balance, end of the period
$
$
522 $
(3,770)
(3,248) $
993 $
(495)
498 $
899
(445)
454
There were no securities—available-for-sale in a nonaccrual status at December 31, 2022 and 2021.
The Company sold no held-to-maturity securities and had no partial calls of securities during the year ended December 31, 2022 and sold one
held-to-maturity security with a resulting net gain of $3,000 and had partial calls of securities that resulted in a net loss of $65,000 during the
year ended December 31, 2021. There were no sales of securities—held-to-maturity during the year ended December 31, 2020, although
there were partial calls of securities that resulted in a net loss of $216,000 for the year ended December 31, 2020. There were no securities—
held-to-maturity in a nonaccrual status at December 31, 2022 and 2021.
During the year ended December 31, 2022, the Company sold no equity securities, compared to a $4.8 million equity security with a resulting
net gain of $46,000 during the year ended December 31, 2021, and two equity securities totaling $1.06 billion for the year ended
December 31, 2020 with a resulting net loss of $177,000. During the year ended December 31, 2020, the Company also sold Visa Class B
stock with a net gain of $519,000. The stock was previously carried at a zero-cost basis due to transfer restrictions and uncertainty of
litigation.
The following table presents the amortized cost and estimated fair value of securities at December 31, 2022, by contractual maturity and does
not reflect any required periodic payments (in thousands). Expected maturities will differ from contractual maturities because some securities
may be called or prepaid with or without call or prepayment penalties.
Trading
December 31, 2022
Available-for-Sale
Held-to-Maturity
Maturing within one year
Maturing after one year through five years
Maturing after five years through ten years
Maturing after ten years
$
$
— $
—
—
27,203
27,203 $
Amortized
Cost
Fair Value
3,624 $
Fair Value
Amortized
Cost
Fair Value
19,161
— $
26,090
227,123
—
20,756
472,026
—
28,694
876,173
2,086,295
28,694 $ 3,218,777 $ 2,789,031 $ 1,117,967 $ 942,180
Amortized
Cost
19,371 $
26,852
21,832
1,049,912
243,507
526,454
2,445,192
3,587 $
The following table presents, as of December 31, 2022, investment securities which were pledged to secure borrowings, public deposits or
other obligations as permitted or required by law (in thousands):
Purpose or beneficiary:
State and local governments public deposits
Interest rate swap counterparties
Repurchase transaction accounts
Other
Total pledged securities
Carrying Value
December 31, 2022
Amortized Cost
Fair Value
$
$
261,878 $
6,384
330,728
2,450
601,440 $
264,582 $
6,826
339,227
2,450
613,085 $
231,405
6,202
277,369
2,416
517,392
100
The Company monitors the credit quality of held-to-maturity debt securities through the use of credit ratings which are reviewed and updated
quarterly. The Company’s non-rated held-to-maturity debt securities are primarily United States government sponsored enterprise debentures
carrying minimal to no credit risk. The non-rated corporate bonds primarily consist of Community Reinvestment Act related bonds secured
by loan instruments from low to moderate income borrowers. The remaining non-rated held-to-maturity debt securities balance is comprised
of local municipal debt from within the Company’s geographic footprint and is monitored through quarterly or annual financial review. This
municipal debt is predominately essential service or unlimited general obligation backed debt. The following tables summarize the amortized
cost of held-to-maturity debt securities by credit rating at December 31, 2022 and December 31, 2021 (in thousands):
AAA/AA/A
Not Rated
AAA/AA/A
Not Rated
December 31, 2022
U.S. Government
and agency
obligations
Municipal bonds
Corporate bonds
Mortgage-backed
or related
securities
$
$
— $
312
312 $
492,105 $
11,012
503,117 $
500 $
2,461
2,961 $
16,681 $
594,896
611,577 $
December 31, 2021
U.S. Government
and agency
obligations
Municipal bonds
Corporate bonds
Mortgage-backed
or related
securities
$
$
— $
316
316 $
406,363 $
14,192
420,555 $
500 $
2,592
3,092 $
— $
97,392
97,392 $
Total
509,286
608,681
1,117,967
Total
406,863
114,492
521,355
The following tables present the activity in the allowance for credit losses for held-to-maturity debt securities by major type for the year
ended December 31, 2022 and December 31, 2021 (in thousands):
U.S.
Government
and agency
obligations
For the Year Ended December 31, 2022
Mortgage-
backed or
related
securities
Municipal
bonds
Corporate
bonds
Total
Allowance for credit losses – securities
Beginning Balance
Recapture of provision for credit losses
Securities charged-off
Recoveries
Ending Balance
$
$
— $
—
—
—
— $
203 $
(20)
—
—
183 $
230 $
(63)
—
29
196 $
— $
—
—
—
— $
433
(83)
—
29
379
U.S.
Government
and agency
obligations
For the Year Ended December 31, 2021
Mortgage-
backed or
related
securities
Corporate
bonds
Municipal
bonds
Total
Allowance for credit losses – securities
Beginning Balance
Provision for credit losses
Securities charged-off
Ending Balance
$
$
— $
—
—
— $
59 $
144
—
203 $
35 $
445
(250)
230 $
— $
—
—
— $
94
589
(250)
433
U.S.
Government
and agency
obligations
For the Year Ended December 31, 2020
Mortgage-
backed or
related
securities
Corporate
bonds
Municipal
bonds
Total
Allowance for credit losses – securities
Beginning Balance
Impact of adopting ASC 326
Provision for credit losses
Ending Balance
— $
—
—
— $
— $
28
31
59 $
— $
35
—
35 $
— $
—
—
— $
—
63
31
94
$
$
101
Note 4: LOANS RECEIVABLE AND THE ALLOWANCE FOR CREDIT LOSSES
During the first quarter of 2022, the Company changed the segmentation of its Small Balance CRE loan category based on the common risk
characteristics used to measure the allowance for credit losses - loans. The presentation of loans receivable at December 31, 2021 has been
updated to match the segmentation used in the current period presentation. The following table presents the loans receivable at December 31,
2022 and 2021 by class (dollars in thousands).
December 31, 2022
December 31, 2021
Amount
Percent of Total
Amount
Percent of Total
Commercial real estate:
Owner-occupied
Investment properties
Small balance CRE
Multifamily real estate
Construction, land and land development:
Commercial construction
Multifamily construction
One- to four-family construction
Land and land development
Commercial business:
Commercial business
Small business scored
(1)
Agricultural business, including secured by farmland(2)
One- to four-family residential
Consumer:
Consumer—home equity revolving lines of credit
Consumer—other
Total loans
Less allowance for credit losses - loans
Net loans
$
845,320
1,589,975
1,200,251
645,071
8.3 % $
15.7
11.8
6.4
831,623
1,674,027
1,281,863
530,885
184,876
325,816
647,329
328,475
1,283,407
947,092
295,077
1,173,112
566,291
114,632
10,146,724
(141,465)
1.8
3.2
6.4
3.2
12.7
9.3
2.9
11.6
5.6
1.1
100.0 %
$
10,005,259
$
167,998
259,116
568,753
313,454
1,170,780
792,310
280,578
657,474
458,533
97,369
9,084,763
(132,099)
8,952,664
9.2 %
18.4
14.1
5.8
1.8
2.9
6.3
3.5
12.9
8.7
3.1
7.2
5.0
1.1
100.0 %
(1) Includes $7.6 million and $132.6 million of SBA Paycheck Protection Program (PPP) loans as of December 31, 2022 and
December 31, 2021, respectively.
(2) Includes $334,000 of SBA PPP loans as of December 31, 2022 and $1.4 million as of December 31, 2021.
Loan amounts are net of unearned loan fees in excess of unamortized costs of $8.1 million as of December 31, 2022 and $8.6 million as of
December 31, 2021. Net loans include net discounts on acquired loans of $6.6 million and $9.7 million as of December 31, 2022 and 2021,
respectively. Net loans does not include accrued interest receivable. Accrued interest receivable on loans was $39.8 million as of
December 31, 2022 and $29.2 million as of December 31, 2021 and was reported in accrued interest receivable on the Consolidated
Statements of Financial Condition.
At December 31, 2022 and 2021, the Company had pledged $6.5 billion and $5.4 billion of loans as collateral for FHLB and other
borrowings, respectively.
The Company’s loans to directors, executive officers and related entities are on substantially the same terms and underwriting as those
prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectability. Such
loans had balances of $683,000 and $700,000 at December 31, 2022 and 2021, respectively.
Purchased credit-deteriorated and purchased non-credit-deteriorated loans. Loans acquired in business combinations are recorded at their
fair value at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased credit-deteriorated (PCD)
or purchased non-credit-deteriorated. There were no PCD loans at December 31, 2022 or 2021.
Troubled Debt Restructurings. Loans are reported as TDRs when the Bank grants one or more concessions to a borrower experiencing
financial difficulties that it would not otherwise consider. The Company’s TDRs have generally not involved forgiveness of amounts due, but
almost always include a modification of multiple factors; the most common combination includes interest rate, payment amount and maturity
date.
102
As of December 31, 2022 and 2021, the Company had TDRs of $4.3 million and $5.5 million, respectively. The Company had no
commitments to advance additional funds related to TDRs as of both December 31, 2022 and 2021.
There were no new TDRs that occurred during the years ended December 31, 2022 or December 31, 2021.
There were no TDRs which incurred a payment default within the years ended December 31, 2022 and 2021, for which the payment default
occurred within twelve months of the restructure date. A default on a TDR results in either a transfer to nonaccrual status or a partial charge-
off, or both
Credit Quality Indicators: To appropriately and effectively manage the ongoing credit quality of the Company’s loan portfolio, management
has implemented a risk-rating or loan grading system for its loans. The system is a tool to evaluate portfolio asset quality throughout each
applicable loan’s life as an asset of the Company. Generally, loans are risk rated on an aggregate borrower/relationship basis with individual
loans sharing similar ratings. There are some instances when specific situations relating to individual loans will provide the basis for different
risk ratings within the aggregate relationship. Loans are graded on a scale of 1 to 9. A description of the general characteristics of these
categories is shown below:
Overall Risk Rating Definitions: Risk-ratings contain both qualitative and quantitative measurements and take into account the financial
strength of a borrower and the structure of the loan or lease. Consequently, the definitions are to be applied in the context of each lending
transaction and judgment must also be used to determine the appropriate risk rating, as it is not unusual for a loan or lease to exhibit
characteristics of more than one risk-rating category. Consideration for the final rating is centered on the borrower’s ability to repay, in a
timely fashion, both principal and interest. The Company’s risk-rating and loan grading policies are reviewed and approved annually. There
were no material changes in the risk-rating or loan grading system for the periods presented.
Risk Ratings 1-5: Pass
Credits with risk ratings of 1 to 5 meet the definition of a pass risk rating. The strength of credits vary within the pass risk ratings, ranging
from a risk rated 1 being an exceptional credit to a risk rated 5 being an acceptable credit that requires a more than normal level of
supervision.
Risk Rating 6: Special Mention
A credit with potential weaknesses that deserves management’s close attention is risk rated a 6.
If left uncorrected, these potential
weaknesses will result in deterioration in the capacity to repay debt. A key distinction between Special Mention and Substandard is that in a
Special Mention credit, there are identified weaknesses that pose potential risk(s) to the repayment sources, versus well defined weaknesses
that pose risk(s) to the repayment sources. Assets in this category are expected to be in this category no more than 9-12 months as the
potential weaknesses in the credit are resolved.
Risk Rating 7: Substandard
A credit with well-defined weaknesses that jeopardize the ability to repay in full is risk rated a 7. These credits are inadequately protected by
either the sound net worth and payment capacity of the borrower or the value of pledged collateral. These are credits with a distinct
possibility of loss. Loans headed for foreclosure and/or legal action due to deterioration are rated 7 or worse.
Risk Rating 8: Doubtful
A credit with an extremely high probability of loss is risk rated 8. These credits have all the same critical weaknesses that are found in a
substandard loan; however, the weaknesses are elevated to the point that based upon current information, collection or liquidation in full is
improbable. While some loss on doubtful credits is expected, pending events may make the amount and timing of any loss
indeterminable. In these situations taking the loss is inappropriate until the outcome of the pending event is clear.
Risk Rating 9: Loss
A credit that is considered to be currently uncollectible or of such little value that it is no longer a viable bank asset is risk rated 9. Losses
should be taken in the accounting period in which the credit is determined to be uncollectible. Taking a loss does not mean that a credit has
absolutely no recovery or salvage value but, rather, it is not practical or desirable to defer writing off the credit, even though partial recovery
may occur in the future.
103
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Note 5: REAL ESTATE OWNED, HELD FOR SALE, NET
The following table presents the changes in REO, net of valuation allowance, for the years ended December 31, 2022, 2021 and 2020 (in
thousands):
Balance, beginning of period
Additions from loan foreclosures
Proceeds from dispositions of REO
Gain on sale of REO
Valuation adjustments in the period
Balance, end of period
Years Ended December 31
2021
2020
2022
$
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352
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816 $
512
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307
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814
1,588
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819
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816
The Company had no foreclosed residential real estate properties held as REO at both December 31, 2022 and December 31, 2021. The
recorded investment in one- to four-family residential loans in the process of foreclosure was $1.1 million and $609,000 at December 31,
2022 and December 31, 2021, respectively.
Note 6: PROPERTY AND EQUIPMENT, NET
Land, buildings and equipment owned by the Company and its subsidiaries at December 31, 2022 and 2021 are summarized as follows (in
thousands):
Land(1)
Buildings and leasehold improvements(1)
Furniture and equipment
Less accumulated depreciation
Property and equipment, net
December 31
2022
2021
27,064 $
145,128
129,451
301,643
(162,889)
138,754 $
29,387
150,238
121,637
301,262
(152,503)
148,759
$
$
(1) The Company had $4.5 million and $3.3 million of properties held for sale that were included in land and buildings at December 31, 2022
and 2021, respectively.
The Company’s depreciation expense related to property and equipment was $16.9 million, $17.3 million, and $18.1 million for the years
ended December 31, 2022, 2021 and 2020, respectively.
119
Note 7: DEPOSITS
Deposits consist of the following at December 31, 2022 and 2021 (in thousands):
Non-interest-bearing checking
Interest-bearing checking
Regular savings accounts
Money market accounts
Total interest-bearing transaction and savings accounts
Certificates of deposit:
Certificates of deposit greater than or equal to $250,000
Certificates of deposit less than $250,000
Total certificates of deposit
Total deposits
Included in total deposits:
Public fund transaction accounts
Public fund interest-bearing certificates
Total public deposits
December 31
2022
6,176,998 $
1,811,153
2,710,090
2,198,288
6,719,531
178,324
545,206
723,530
13,620,059 $
2021
6,385,177
1,947,414
2,784,716
2,370,995
7,103,125
184,515
654,116
838,631
14,326,933
392,859 $
26,810
419,669 $
353,874
39,961
393,835
$
$
$
$
Deposits at December 31, 2022 and 2021 included deposits from the Company’s directors, executive officers and related entities totaling $9.7
million and $13.1 million, respectively.
Scheduled maturities and weighted average interest rates of certificates of deposits at December 31, 2022 are as follows (dollars in
thousands):
Maturing in one year or less
Maturing after one year through two years
Maturing after two years through three years
Maturing after three years through four years
Maturing after four years through five years
Maturing after five years
Total certificates of deposit
December 31, 2022
Amount
Weighted Average Rate
$
$
531,643
142,993
33,779
8,638
5,098
1,379
723,530
0.48 %
1.91
0.54
0.39
0.35
0.78
0.76 %
Note 8: ADVANCES FROM FEDERAL HOME LOAN BANK OF DES MOINES
Utilizing a blanket pledge, qualifying loans receivable at December 31, 2022 and 2021, were pledged as security for FHLB borrowings and
there were no securities pledged as collateral as of December 31, 2022 or 2021. At December 31, 2022 and 2021, FHLB advances were
scheduled to mature as follows (dollars in thousands):
At or for the Years Ended December 31
Amount
2022
Weighted Average Rate
Amount
Maturing in one year or less
Maturing after one year through three years
Maturing after three years through five years
Maturing after five years
Total FHLB advances
$
$
50,000
—
—
—
50,000
4.60 % $
—
—
—
4.60 % $
50,000
—
—
—
50,000
2021
Weighted Average Rate
2.72 %
—
—
—
2.72 %
120
The maximum amount outstanding from the FHLB advances at any month end for the years ended December 31, 2022 and 2021 was $75.0
million and $150.0 million, respectively. The average FHLB advances balance outstanding for the years ended December 31, 2022 and 2021
was $15.3 million and $97.9 million, respectively. The average contractual interest rate on the FHLB advances for the years ended
December 31, 2022 and 2021 was 3.20% and 2.65%, respectively. As of December 31, 2022, the Bank has established a borrowing line with
the FHLB to borrow up to 45% of its total assets, contingent on having sufficient qualifying collateral and ownership of FHLB stock. At
December 31, 2022, under these credit facilities based on pledged collateral, the Bank had $2.99 billion of available credit capacity.
Note 9: OTHER BORROWINGS
Other borrowings consist of retail and wholesale repurchase agreements, other term borrowings and Federal Reserve Bank borrowings.
Repurchase Agreements: At December 31, 2022, retail repurchase agreements carry interest rates ranging from 0.05% to 2.50%. These
repurchase agreements are secured by the pledge of certain mortgage-backed and agency securities with a carrying value of
$330.7 million. The Bank has the right to pledge or sell these securities, but it must replace them with substantially the same securities. The
Bank had no borrowings under wholesale repurchase agreements at December 31, 2022 or December 31, 2021.
Federal Reserve Bank of San Francisco and fed fund lines: The Bank periodically borrows funds on an overnight basis from the Federal
Reserve Bank through the Borrower-In-Custody program. Such borrowings are secured by a pledge of eligible loans. At December 31, 2022,
based upon available unencumbered collateral, the Bank was eligible to borrow $1.19 billion from the Federal Reserve Bank, although, at that
date, as well as at December 31, 2021, the Bank had no funds borrowed under this arrangement.
At December 31, 2022, the Bank had uncommitted federal funds lines of credit agreements with other financial institutions totaling $125.0
million. No balances were outstanding under these agreements as of December 31, 2022 and 2021. Availability of lines is subject to federal
funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs and the
agreements may restrict consecutive day usage.
A summary of all other borrowings at December 31, 2022 and 2021 by the period remaining to maturity is as follows (dollars in thousands):
Repurchase agreements:
Maturing in one year or less
Maturing after one year through two years
Maturing after two years
Total year-end outstanding
Average outstanding
Maximum outstanding at any month-end
At or for the Years Ended December 31
2022
2021
Amount
Weighted
Average Rate
Amount
Weighted
Average Rate
$
$
$
$
232,799
—
—
232,799
249,681
266,776
0.35 % $
—
—
0.35 % $
0.15 % $
n/a $
264,490
—
—
264,490
240,817
258,779
0.13 %
—
—
0.13 %
0.19 %
n/a
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Note 11: INCOME TAXES
The following table presents the components of the provision for income taxes included in the Consolidated Statements of Operations for the
years ended December 31, 2022, 2021 and 2020 (in thousands):
Current
Federal
State
Total Current
Deferred
Federal
State
Total Deferred
Provision for income taxes
Years Ended December 31
2022
2021
2020
$
26,653 $
5,882
32,535
20,461 $
4,359
24,820
30,325
6,964
37,289
11,595
1,267
12,862
18,278
2,448
20,726
(8,134)
(2,630)
(10,764)
$
45,397 $
45,546 $
26,525
The following table presents the reconciliation of the federal statutory rate to the actual effective rate for the years ended December 31, 2022,
2021 and 2020:
Federal income tax statutory rate
Increase (decrease) in tax rate due to:
Tax-exempt interest
Investment in life insurance
State income taxes, net of federal tax offset
Tax credits
Low income housing partnerships, net of amortization
Other
Effective income tax rate
Years Ended December 31
2022
21.0 %
2021
21.0 %
(3.6)
(0.7)
2.3
(1.9)
1.3
0.5
18.9 %
(3.0)
(0.4)
2.2
(1.5)
1.1
(0.9)
18.5 %
2020
21.0 %
(4.4)
(0.9)
2.5
(2.6)
1.6
1.4
18.6 %
123
The following table reflects the effect of temporary differences that gave rise to the components of the net deferred tax asset as of
December 31, 2022 and 2021 (in thousands):
Deferred tax assets:
Loan loss and REO
Deferred compensation
Net operating loss carryforward
Federal and state tax credits
State net operating losses
Loan discount
Lease liability
Unrealized loss on securities - available-for-sale, net
Other
Total deferred tax assets
Deferred tax liabilities:
Depreciation
Deferred loan fees, servicing rights and loan origination costs
Intangibles
Right of use asset
Financial instruments accounted for under fair value accounting
Total deferred tax liabilities
Deferred income tax asset
Valuation allowance
Deferred tax asset, net
December 31
2022
37,615 $
22,033
15,470
1,545
4,558
1,104
12,997
114,708
4,782
214,812
(6,458)
(13,331)
(3,929)
(11,603)
(1,176)
(36,497)
178,315
(184)
178,131 $
2021
34,753
21,193
20,159
7,631
5,179
1,830
14,136
91
5,091
110,063
(7,119)
(12,696)
(4,977)
(13,071)
(878)
(38,741)
71,322
(184)
71,138
$
$
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recognized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income tax expense in the period of enactment.
At December 31, 2022, the Company had federal net operating loss carryforwards of $73.7 million. The Company also has $64.6 million of
state net operating loss carryforwards, against which the Company has established a $184,000 valuation reserve. The federal and state net
operating losses will expire, if unused, by the end of 2034. The Company has federal general business credit carryforwards at December 31,
2022 of $219,000, which will expire, if unused, by the end of 2031. The Company also has federal alternative minimum tax credit
carryforwards of $1.2 million, which are available to reduce future federal regular income taxes, if any, over an indefinite period. At
December 31, 2021, the Company had federal and state net operating loss carryforwards of approximately $96.0 million and $72.5 million,
respectively, and federal general business credits carryforwards of $3.3 million. At that same date, the Company also had federal alternative
minimum tax credit carryforwards of approximately $4.2 million. The Company had $100,000 of state credits at both December 31, 2022 and
2021, which are waiting for state funding before they can be utilized.
As a consequence of the Company’s 2015 acquisition of Starbuck Bancshares, Inc., the Company experienced a change in control within the
meaning of Section 382 of the Code. In addition, the underlying Section 382 limitations at Starbuck Bancshares, Inc.’s level continue to
apply to the Company. Section 382 limits the ability of a corporate taxpayer to use net operating loss carryforwards, general business credits,
and recognized built-in-losses, on an annual basis, incurred prior to the change in control against income earned after the change in control.
As a result of the Section 382 limitations, the Company is limited to utilizing $21.5 million on an annual basis (after the application of the
Section 382 limitations carried over from Starbuck Bancshares, Inc.) of federal net operating loss carryforwards, general business credits, and
recognized built-in losses. The applicable state Section 382 limitations range from $525,000 to $21.5 million. In 2017, the Company
established a $184,000 valuation reserve against the portion of its various state net operating loss carryforwards and tax credits that it believed
it is more likely than not that it would not realize the benefit because the application of the Section 382 limitations at the state level is based
on future apportionment rates. For non-Section 382 limited alternative minimum tax credits, the credits expired in 2019 due to the passage of
the CARES Act in 2020.
As a consequence of Banner’s capital raise in June 2010, the Company experienced a change in control within the meaning of Section 382 of
the Code. As a result of the Section 382 limitations, the Company is limited to utilizing $6.9 million of net operating loss carryforwards
which existed prior to the acquisition of Starbuck Bancshares, Inc., on an annual basis. Based on its analysis, the Company believes it is more
likely than not that the June 2010 change in control will not impact its ability to utilize all of the related available net operating loss
carryforwards, general business credits, and recognized built-in-losses. As of December 31, 2022, the Company had utilized all federal net
operating losses and credits limited due to the June 2010 change in control. Certain state net operating losses subject to the change of control
limitations are still outstanding.
124
As a consequence of the Company’s 2019 acquisition of AltaPacific and AltaPacific Bank, the Company did not experience a change in
control within the meaning of Section 382 of the Code. However, the underlying Section 382 limitations at AltaPacific and AltaPacific
Bank’s continue to apply to the Company. As a result of the Section 382 limitations, the Company is limited to utilizing $110,000 of the
federal net operating loss carryovers and general business credits acquired from AltaPacific and AltaPacific Bank based on underlying limits
carried over. Based on its analysis, the Company believes it is more likely than not that the Section 382 limitations will not impact its ability
to utilize all of the related available net operating loss carryforwards and general business credits.
Retained earnings at December 31, 2022 and 2021 included approximately $5.4 million in tax basis bad debt reserves for which no income
tax liability has been recorded. In the future, if this tax bad debt reserve is used for purposes other than to absorb bad debts or the Company
no longer qualifies as a bank or is completely liquidated, the Company will incur a federal tax liability at the then-prevailing corporate tax
rate, established as $1.1 million at December 31, 2022.
A reconciliation of the beginning and ending amount of total unrecognized state tax benefits for the years ended December 31, 2022 and 2021
is as follows (in thousands):
Balance, beginning of year
Changes related to prior year tax positions
Changes related to current year tax positions
Balance, end of year
Years Ended December 31
2021
450
365
185
1,000
2022
1,000 $
415
185
1,600 $
$
$
None of the unrecognized tax benefits, if recognized, would materially affect the effective tax rate. The Company does not anticipate that the
amount of unrecognized tax benefits will significantly increase or decrease in the next twelve months. The Company’s policy is to recognize
interest and penalties on unrecognized tax benefits in income tax expense. The amount of interest and penalties accrued for the years ended
December 31, 2022, 2021 and 2020 is immaterial. The Company files consolidated income tax returns in Oregon, California, Utah, Montana
and Idaho and for federal purposes. The Company is no longer subject to tax examination for tax years before 2019.
Tax credit investments: The Company invests in low income housing tax credit funds that are designed to generate a return primarily through
the realization of federal tax credits. The Company accounts for these investments by amortizing the cost of tax credit investments over the
life of the investment using a proportional amortization method and tax credit investment amortization expense is a component of the
provision for income taxes.
The following table presents the balances of the Company’s tax credit investments and related unfunded commitments at December 31, 2022
and 2021 (in thousands):
Tax credit investments
Unfunded commitments—tax credit investments
December 31, 2022
December 31, 2021
$
71,430 $
44,563
56,589
31,174
The following table presents other information related to the Company’s tax credit investments for the years ended December 31, 2022, 2021
and 2020 (in thousands):
Tax credits and other tax benefits recognized
Tax credit amortization expense included in provision for income taxes
Note 12: EMPLOYEE BENEFIT PLANS
For the years ended December 31,
2020
3,842
2,992
2022
$ 5,621 $
4,638
2021
4,390 $
3,816
Employee Retirement Plans: Substantially all of the Company’s and the Bank’s employees are eligible to participate in its 401(k)/Profit
Sharing Plan, a defined contribution and profit sharing plan sponsored by the Company. Employees may elect to have a portion of their
salary contributed to the plan in conformity with Section 401(k) of the Internal Revenue Code. At the discretion of the Company’s Board of
Directors, the Company may elect to make matching and/or profit sharing contributions for the employees’ benefit. For the years ended
December 31, 2022, 2021 and 2020, $6.9 million, $6.5 million and $6.7 million, respectively, was expensed for 401(k) contributions. During
2022, the Board of Directors elected to make a 4% of eligible compensation matching contribution.
125
Supplemental Retirement and Salary Continuation Plans: Through the Bank, the Company is obligated under various non-qualified deferred
compensation plans to help supplement the retirement income of certain executives, including certain retired executives, selected by
resolution of the Bank’s Boards of Directors or in certain cases by the former directors of acquired banks. These plans are unfunded, include
both defined benefit and defined contribution plans, and provide for payments after the executive’s retirement. In the event of a participant
employee’s death prior to or during retirement, the Company is obligated to pay to the designated beneficiary the benefits set forth under the
plan. For the years ended December 31, 2022, 2021 and 2020, expense recorded for supplemental retirement and salary continuation plan
benefits totaled $2.0 million, $3.3 million, and $2.1 million, respectively. At December 31, 2022 and 2021, liabilities recorded for the various
supplemental retirement and salary continuation plan benefits totaled $37.1 million and $39.4 million, respectively, and are recorded in a
deferred compensation liability account.
Deferred Compensation Plans and Rabbi Trusts: The Company and the Bank also offer non-qualified deferred compensation plans to
members of their Boards of Directors and certain employees. The plans permit each participant to defer a portion of director fees, non-
qualified retirement contributions, salary or bonuses for future receipt. Compensation is charged to expense in the period earned. In
connection with its acquisitions, the Company also assumed liability for certain deferred compensation plans for key employees, retired
employees and directors.
In order to fund the plans’ future obligations, the Company has purchased life insurance policies or other investments, including Banner
common stock, which in certain instances are held in irrevocable trusts commonly referred to as “Rabbi Trusts.” As the Company is the
owner of the investments and the beneficiary of the insurance policies, and in order to reflect the Company’s policy to pay benefits equal to
the accumulations, the assets and liabilities are reflected in the Consolidated Statements of Financial Condition. Banner common stock held
for such plans is reported as a contra-equity account and was recorded at an original cost of $6.9 million at December 31, 2022 and $7.4
million at December 31, 2021. At December 31, 2022 and 2021, liabilities recorded in connection with deferred compensation plan benefits
totaled $14.5 million ($6.9 million in contra-equity) and $15.0 million ($7.4 million in contra-equity), respectively, and are recorded in
deferred compensation or equity as appropriate.
The Bank has purchased, or acquired through mergers, life insurance policies in connection with the implementation of certain executive
supplemental retirement, salary continuation and deferred compensation retirement plans, as well as additional policies not related to any
specific plan. These policies provide protection against the adverse financial effects that could result from the death of a key employee and
provide tax-exempt income to offset expenses associated with the plans. It is the Bank’s intent to hold these policies as a long-term
investment. However, there will be an income tax impact if the Bank chooses to surrender certain policies. Although the lives of individual
current or former management-level employees are insured, the Bank is the owner and sole or partial beneficiary. At December 31, 2022 and
2021, the cash surrender value of these policies was $297.6 million and $244.2 million, respectively. The Bank is exposed to credit risk to the
extent an insurance company is unable to fulfill its financial obligations under a policy. In order to mitigate this risk, the Bank uses a variety
of insurance companies and regularly monitors their financial condition.
Note 13: STOCK-BASED COMPENSATION PLANS
The Company operates the following stock-based compensation plans as approved by its shareholders:
•
•
2014 Omnibus Incentive Plan (the 2014 Plan).
2018 Omnibus Incentive Plan (the 2018 Plan).
The purpose of these plans is to promote the success and enhance the value of the Company by providing a means for attracting and retaining
highly skilled employees, officers and directors of Banner and its affiliates and linking their personal interests with those of the Company’s
shareholders. Under these plans the Company currently has outstanding restricted stock share grants and restricted stock unit grants.
2014 Omnibus Incentive Plan
The 2014 Plan was approved by shareholders on April 22, 2014. The 2014 Plan provides for the grant of incentive stock options, non-
qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, other stock-
based awards and other cash awards, and provides for vesting requirements which may include time-based or performance-based conditions.
The Company reserved 900,000 shares of its common stock for issuance under the 2014 Plan in connection with the exercise of awards. As
of December 31, 2022, 272,495 restricted stock shares and 429,982 restricted stock units have been granted under the 2014 Plan of which
1,552 restricted stock shares and 23,170 restricted stock units are unvested.
2018 Omnibus Incentive Plan
The 2018 Plan was approved by shareholders on April 24, 2018. The 2018 Plan provides for the grant of incentive stock options, non-
qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, other stock-
based awards and other cash awards, and provides for vesting requirements which may include time-based or performance-based conditions.
The Company reserved 900,000 shares of common stock for issuance under the 2018 Plan in connection with the exercise of awards. As of
December 31, 2022, 556,269 restricted stock units have been granted under the 2018 Plan of which 358,005 restricted stock units are
unvested.
126
The expense associated with all restricted stock and unit grants was $8.9 million, $9.3 million and $9.2 million respectively, for the years
ended December 31, 2022, 2021 and 2020. Unrecognized compensation expense for these awards as of December 31, 2022 was $10.9
million and will be recognized over a weighted average period of 24 months.
A summary of the Company’s Restricted Stock/Unit award activity during the years ended December 31, 2022, 2021 and 2020 follows:
Shares/Units
Weighted Average Grant-Date Fair Value
Unvested at January 1, 2020
Granted (380,004 non-voting)
Vested
Forfeited
Unvested at December 31, 2020
Granted (181,309 non-voting)
Vested
Forfeited
Unvested at December 31, 2021
Granted (138,022 non-voting)
Vested
Forfeited
Unvested at December 31, 2022
382,872 $
384,807
(146,919)
(42,624)
578,136
183,548
(232,267)
(53,195)
476,222
139,574
(193,082)
(39,987)
382,727
54.39
33.49
55.18
47.90
40.76
55.52
45.37
45.95
43.62
58.87
45.30
47.63
49.98
127
Note 14: REGULATORY CAPITAL REQUIREMENTS
Banner is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements
of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. Banner Bank,
as a state-chartered federally insured commercial bank, is subject to the capital requirements established by the FDIC. The Federal Reserve
requires Banner to maintain capital adequacy that generally parallels the FDIC requirements.
The following table shows the regulatory capital ratios of the Company and the Bank and the minimum regulatory requirements (dollars in
thousands):
Actual
Amount
Ratio
Minimum for Capital
Adequacy Purposes
Ratio
Amount
Minimum to be
Categorized as “Well-
Capitalized” Under
Prompt Corrective Action
Provisions
Amount
Ratio
December 31, 2022:
Banner Corporation—consolidated:
Total capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Tier 1 capital to average leverage assets
Tier 1 common equity to risk-weighted assets
$ 1,769,064
1,528,694
1,528,694
1,442,194
14.04 % $ 1,008,232
756,174
12.13
647,345
9.45
567,130
11.44
8.00 % $ 1,260,290
756,174
6.00
n/a
4.00
n/a
4.50
10.00 %
6.00
n/a
n/a
Banner Bank:
Total capital to risk- weighted assets
Tier 1 capital to risk- weighted assets
Tier 1 capital to average leverage assets
Tier 1 common equity to risk-weighted assets
1,684,766
1,544,396
1,544,396
1,544,396
13.38
12.27
9.55
12.27
1,007,325
755,494
646,935
566,620
8.00
6.00
4.00
4.50
1,259,156
1,007,325
808,668
818,452
10.00
8.00
5.00
6.50
December 31, 2021:
Banner Corporation—consolidated:
Total capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Tier 1 capital to average leverage assets
Tier 1 common equity to risk-weighted assets
$ 1,663,943
1,440,694
1,440,694
1,305,194
14.71 % $
12.74
8.76
11.54
Banner Bank:
Total capital to risk- weighted assets
Tier 1 capital to risk- weighted assets
Tier 1 capital to average leverage assets
Tier 1 common equity to risk-weighted assets
1,552,204
1,428,955
1,428,955
1,428,955
13.73
12.64
8.69
12.64
904,633
678,474
658,091
508,856
904,159
678,119
657,882
508,589
8.00 % $ 1,130,791
678,474
6.00
n/a
4.00
n/a
4.50
10.00 %
6.00
n/a
n/a
8.00
6.00
4.00
4.50
1,130,199
904,159
822,353
734,629
10.00
8.00
5.00
6.50
At December 31, 2022, Banner and the Bank each exceeded the requirements to be “well capitalized” and the fully phased-in capital
conservation buffer requirement. There have been no conditions or events since December 31, 2022 that have materially adversely changed
the Tier 1 or Tier 2 capital of the Company or the Bank. However, events beyond the control of the Bank, such as weak or depressed
economic conditions in areas where the Bank has most of its loans, could adversely affect future earnings and, consequently, the ability of the
Bank to meet its respective capital requirements. The Company may not declare or pay cash dividends on, or repurchase, any of its shares of
common stock if the effect thereof would cause equity to be reduced below applicable regulatory capital maintenance requirements or if such
declaration and payment would otherwise violate regulatory requirements.
Note 15: GOODWILL, OTHER INTANGIBLE ASSETS AND MORTGAGE SERVICING RIGHTS
Goodwill and Other Intangible Assets: At December 31, 2022, intangible assets are comprised of goodwill and CDI acquired in business
combinations. Goodwill represents the excess of the purchase consideration paid over the fair value of the assets acquired, net of the fair
values of liabilities assumed in a business combination, and is not amortized but is reviewed at least annually for impairment. Banner has
identified one reporting unit for purposes of evaluating goodwill for impairment. At December 31, 2022, the Company completed an
assessment of qualitative factors and concluded that no further analysis was required as it is more likely than not that the fair value of the
Bank, the reporting unit, exceeds the carrying value.
128
CDI represents the value of transaction-related deposits and the value of the client relationships associated with the deposits. The Company
amortizes CDI assets over their estimated useful lives and reviews them at least annually for events or circumstances that could impair their
value. The CDI assets shown in the table below represent the value ascribed to the long-term deposit relationships acquired in various bank
acquisitions. These intangible assets are being amortized using an accelerated method over estimated useful lives of eight years to ten
years. The CDI assets are not estimated to have a significant residual value.
The following table summarizes the changes in the Company’s goodwill and other intangibles for the years ended December 31, 2022, 2021
and 2020 (in thousands):
Balance, January 1, 2020
Amortization
Balance, December 31, 2020
Amortization
Balance, December 31, 2021
Amortization
Other Changes(1)
Balance, December 31, 2022
Goodwill
CDI
Total
$
$
373,121 $
—
373,121
—
373,121
—
—
373,121 $
29,158 $
(7,732)
21,426
(6,571)
14,855
(5,279)
(136)
9,440 $
402,279
(7,732)
394,547
(6,571)
387,976
(5,279)
(136)
382,561
(1) Acquired CDI was adjusted for the sale of branches in 2022.
Estimated amortization expense with respect to CDI as of December 31, 2022 for the periods indicated (in thousands):
Year ended:
2023
2024
2025
2026
2026
Thereafter
Net carrying amount
Estimated Amortization
3,756
$
2,626
1,567
904
426
161
9,440
$
Mortgage Servicing Rights: Mortgage and SBA servicing rights are reported in other assets. SBA servicing rights are initially recorded and
carried at fair value. Mortgage servicing rights are initially recognized at fair value and are amortized in proportion to, and over the period of,
the estimated future net servicing income of the underlying financial assets. Mortgage servicing rights are subsequently evaluated for
impairment based upon the fair value of the rights compared to the amortized cost (remaining unamortized initial fair value). If the fair value
is less than the amortized cost, a valuation allowance is created through an impairment charge to servicing fee income. However, if the fair
value is greater than the amortized cost, the amount above the amortized cost is not recognized in the carrying value. In 2022, 2021 and 2020,
the Company did not record any impairment charges or recoveries against mortgage servicing rights. Unpaid principal balance of loans for
which mortgage and SBA servicing rights have been recognized totaled $2.77 billion at both December 31, 2022 and 2021. Custodial
accounts maintained in connection with this servicing totaled $11.2 million and $3.2 million at December 31, 2022 and 2021, respectively.
An analysis of the mortgage and SBA servicing rights for the years ended December 31, 2022, 2021 and 2020 is presented below (in
thousands):
Balance, beginning of the year
Additions—amounts capitalized
Additions—through purchase
(1)
Amortization
Fair value adjustments
(2)
(3)
Balance, end of the year
Years Ended December 31
2021
2020
2022
$
$
17,206 $
3,200
285
(4,216)
(309)
16,166 $
15,223 $
7,260
159
(6,580)
1,144
17,206 $
14,148
8,572
175
(7,672)
—
15,223
(1) Amortization of mortgage servicing rights is recorded as a reduction of loan servicing income within mortgage banking operations and
any unamortized balance is fully amortized if the loan repays in full.
(2) There was no valuation allowance on mortgage servicing rights as of both December 31, 2022 and 2021.
(3) Fair value adjustments relate to SBA servicing rights. These adjustments are estimated based on an independent dealer analysis by
discounting estimated net future cash flows from servicing SBA loans.
129
Note 16: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents estimated fair values of the Company’s financial instruments as of December 31, 2022 and 2021, whether or not
recognized or recorded in the Consolidated Statements of Financial Condition (in thousands):
Assets:
Cash and cash equivalents
Securities—trading
Securities—available-for-sale
Securities—held-to-maturity
Securities—held-to-maturity
Securities purchased under agreements to resell
Loans held for sale
Loans receivable, net
Equity securities
FHLB stock
Bank-owned life insurance
Mortgage servicing rights
SBA servicing rights
Investments in limited partnerships
Derivatives:
Interest rate swaps
Interest rate lock and forward sales
commitments
Liabilities:
Demand, interest checking and money market
accounts
Regular savings
Certificates of deposit
FHLB advances
Other borrowings
Subordinated notes, net
Junior subordinated debentures
Derivatives:
Interest rate swaps
Interest rate lock and forward sales
commitments
Risk participation agreement
December 31, 2022
December 31, 2021
Level
Carrying Value
Estimated Fair
Value
Carrying Value
Estimated Fair
Value
1
3
2
2
3
2
2
3
1
3
1
3
3
3
2
2,3
2
2
2
2
2
2
3
2
2,3
2
$
243,062 $
28,694
2,789,031
1,109,319
8,648
300,000
56,857
10,005,259
553
12,000
297,565
15,331
835
12,427
243,062 $
28,694
2,789,031
933,513
8,667
300,000
56,948
9,810,965
553
12,000
297,565
35,148
835
12,427
2,134,300 $
26,981
3,638,993
464,008
57,347
300,000
96,487
8,952,664
1,000
12,000
244,156
16,045
1,161
10,257
19,339
142
19,339
142
20,826
1,555
10,186,439
2,710,090
723,530
50,000
232,799
98,947
74,857
10,186,439
2,710,090
702,581
50,000
232,799
96,718
74,857
10,703,586
2,784,716
838,631
50,000
264,490
98,564
119,815
2,134,300
26,981
3,638,993
484,483
57,370
300,000
96,914
9,100,516
1,298
12,000
244,156
24,393
1,161
10,257
20,826
1,555
10,703,586
2,784,716
836,877
50,287
264,490
105,241
119,815
37,150
37,150
11,615
11,615
118
67
118
67
140
—
140
—
The Company measures and discloses certain assets and liabilities at fair value. Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (that is, not a forced
liquidation or distressed sale). When measuring fair value, management will maximize the use of observable inputs and minimize the use of
unobservable inputs whenever possible. Observable inputs reflect market data obtained from independent sources, while unobservable inputs
reflect the Company’s estimates for market assumptions.
The estimated fair value amounts of financial instruments have been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize at a future
date. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value
amounts. In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation
techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial
instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.
130
Items Measured at Fair Value on a Recurring Basis:
The following tables present financial assets and liabilities measured at fair value on a recurring basis and the level within the fair value
hierarchy of the fair value measurements for those assets and liabilities as of December 31, 2022 and 2021 (in thousands):
Assets:
Securities—trading
Corporate bonds (TPS securities)
$
— $
— $
28,694 $
28,694
December 31, 2022
Level 1
Level 2
Level 3
Total
Securities—available-for-sale
U.S. Government and agency obligations
Municipal bonds
Corporate bonds
Mortgage-backed or related securities
Asset-backed securities
Loans held for sale(1)
Equity securities
SBA servicing rights
Investment in limited partnerships
Derivatives
Interest rate swaps
Interest rate lock and forward sales commitments
Liabilities:
Junior subordinated debentures
Derivatives
Interest rate swaps
Interest rate lock and forward sales commitments
Risk participation agreement
—
—
—
—
—
—
—
553
—
—
55,108
261,209
121,853
2,139,336
211,525
2,789,031
2,305
—
—
—
—
—
—
—
—
—
—
—
835
12,427
55,108
261,209
121,853
2,139,336
211,525
2,789,031
2,305
553
835
12,427
—
—
553 $
19,339
61
2,810,736 $
—
81
42,037 $
19,339
142
2,853,326
— $
—
—
—
— $
— $
74,857 $
74,857
37,150
76
67
37,293 $
—
42
—
74,899 $
37,150
118
67
112,192
$
$
$
131
Assets:
Securities—trading
Corporate bonds (TPS securities)
$
— $
— $
26,981 $
26,981
December 31, 2021
Level 1
Level 2
Level 3
Total
Securities—available-for-sale
U.S. Government and agency obligations
Municipal bonds
Corporate bonds
Mortgage-backed or related securities
Asset-backed securities
(1)
Loans held for sale
SBA servicing rights
Investment in limited partnerships
Derivatives
Interest rate swaps
Interest rate lock and forward sales commitments
Liabilities
Junior subordinated debentures
Derivatives
Interest rate swaps
Interest rate lock and forward sales commitments
$
$
$
—
—
—
—
—
—
—
—
—
—
—
— $
— $
—
—
— $
201,332
308,612
117,347
2,805,268
206,434
3,638,993
39,775
—
—
20,826
88
3,699,682 $
—
—
—
—
—
—
—
1,161
10,257
201,332
308,612
117,347
2,805,268
206,434
3,638,993
39,775
1,161
10,257
—
1,467
39,866 $
20,826
1,555
3,739,548
— $
119,815 $
119,815
11,615
140
11,755 $
—
—
119,815 $
11,615
140
131,570
(1) The unpaid principal balance of residential mortgage loans held for sale carried at fair value on a recurring basis was $2.2 million and
$38.6 million at December 31, 2022 and 2021, respectively.
The following methods were used to estimate the fair value of each class of financial instruments above:
Securities: The estimated fair values of investment securities and mortgaged-backed securities are priced using current active market quotes,
if available, which are considered Level 1 measurements. For most of the portfolio, matrix pricing based on the securities’ relationship to
other benchmark quoted prices is used to establish the fair value. These measurements are considered Level 2. Due to the continued limited
activity in the trust preferred markets that have limited the observability of market spreads for some of the Company’s TPS securities,
management has classified these securities as a Level 3 fair value measure. Management periodically reviews the pricing information
received from third-party pricing services and tests those prices against other sources to validate the reported fair values.
Loans Held for Sale: Fair values for residential mortgage loans held for sale are determined by comparing actual loan rates to current
secondary market prices for similar loans.
Equity Securities: Equity securities are invested in a publicly traded stock. The fair value of these securities are based on daily quoted market
prices.
SBA Servicing Rights: Fair values are estimated based on an independent dealer analysis by discounting estimated net future cash flows from
servicing. The evaluation utilizes assumptions market participants would use in determining fair value including prepayment speeds,
delinquency and foreclosure rates, the discount rate, servicing costs, and the timing of cash flows. The SBA servicing portfolio is stratified by
loan type and fair value estimates are adjusted up or down based on the serviced loan interest rates versus current rates on new loan
originations since the most recent independent analysis.
132
Junior Subordinated Debentures: The fair value of junior subordinated debentures is estimated using an income approach technique. The
significant inputs included in the estimation of fair value are the credit risk adjusted spread and three month LIBOR. The credit risk adjusted
spread represents the nonperformance risk of the liability. The Company utilizes an external valuation firm to validate the reasonableness of
the credit risk adjusted spread used to determine the fair value. The junior subordinated debentures are carried at fair value which represents
the estimated amount that would be paid to transfer these liabilities in an orderly transaction amongst market participants. Due to inactivity in
the trust preferred markets that have limited the observability of market spreads, management has classified this as a Level 3 fair value
measurement.
Derivatives: Derivatives include interest rate swap agreements, interest rate lock commitments to originate loans held for sale, forward sales
contracts to sell loans and securities related to mortgage banking activities and risk participation agreements. Fair values for these
instruments, which generally change as a result of changes in the level of market interest rates, are estimated based on dealer quotes and
secondary market sources. As the interest rate lock commitments use a pull-through rate that is considered an unobservable input, these
derivatives are classified as a level 3 fair value measurement.
Off-Balance Sheet Items: Off-balance sheet financial instruments include unfunded commitments to extend credit, including standby letters
of credit, and commitments to purchase investment securities. The fair value of these instruments is not considered to be material.
Limitations: The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2022
and 2021. The factors used in the fair value estimates are subject to change subsequent to the dates the fair value estimates are completed,
therefore, current estimates of fair value may differ significantly from the amounts presented herein.
Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3):
The following table provides a description of the valuation technique, unobservable inputs and quantitative and qualitative information about
the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring and non-
recurring basis at December 31, 2022 and 2021:
December 31
Financial Instruments
Corporate bonds (TPS securities)
Junior subordinated debentures
Loans individually evaluated
REO
Interest rate lock commitments
Investments in limited partnerships
SBA servicing rights
Valuation Technique
Discounted cash flows
Discounted cash flows
Collateral valuations
Appraisals
Pricing model
Net Asset Value
Discounted cash flows
Unobservable Inputs
Discount rate
Discount rate
Discount to appraised value
Discount to appraised value
Pull-through rate
Infrequent transactions
Constant prepayment rate
2022
Weighted
Average Rate
8.27 %
8.27 %
2021
Weighted
Average Rate
3.71 %
3.71 %
n/a 8.5% to 20.0%
60.91 %
86.64 %
n/a
12.25%
68.35 %
78.65 %
n/a
14.10%
TPS Securities: Management believes that the credit risk-adjusted spread used to develop the discount rate utilized in the fair value
measurement of TPS securities is indicative of the risk premium a willing market participant would require under current market conditions
for instruments with similar contractual rates and terms and conditions and issuers with similar credit risk profiles and with similar expected
probability of default. Management attributes the change in fair value of these instruments, compared to their par value, primarily to
perceived general market adjustments to the risk premiums for these types of assets subsequent to their issuance.
Junior subordinated debentures: Similar to the TPS securities discussed above, management believes that the credit risk-adjusted spread
utilized in the fair value measurement of the junior subordinated debentures is indicative of the risk premium a willing market participant
would require under current market conditions for an issuer with Banner’s credit risk profile. Management attributes the change in fair value
of the junior subordinated debentures, compared to their par value, primarily to perceived general market adjustments to the risk premiums for
these types of liabilities subsequent to their issuance. Future contractions in the risk adjusted spread relative to the spread currently utilized to
measure the Company’s junior subordinated debentures at fair value as of December 31, 2022, or the passage of time, will result in negative
fair value adjustments. At December 31, 2022, the discount rate utilized was based on a credit spread of 350 basis points and three month
LIBOR of 477 basis points.
Interest rate lock commitments: The fair value of the interest rate lock commitments is based on secondary market sources adjusted for an
estimated pull-through rate. The pull-through rate is based on historical loan closing rates for similar interest rate lock commitments. An
increase or decrease in the pull-through rate would have a corresponding, positive or negative fair value adjustment.
SBA servicing asset: The constant prepayment rate (CPR) is set based on industry data. An increase in the CPR would result in a negative
fair value adjustment, where a decrease in CPR would result in a positive fair value adjustment.
133
The following table provides a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level
3) on a recurring basis during the years ended December 31, 2022 and 2021 (in thousands):
Borrowings—
Junior
Subordinated
Debentures
Level 3 Fair Value Inputs
Interest Rate
Lock and
Forward Sales
Commitments
Investments in
Limited
Partnerships
SBA Servicing
Asset
TPS Securities
Balance, January 1, 2021
Net change recognized in earnings
Net change recognized in AOCI
Purchases, issuances and settlements
Redemptions
Balance, December 31, 2021
Net change recognized in earnings
Net change recognized in AOCI
Purchases, issuances and settlements
Redemptions
Balance, December 31, 2022
$
$
24,980 $
2,001
—
—
—
26,981
1,713
—
—
—
28,694 $
116,974 $
—
11,089
—
(8,248)
119,815
—
5,560
—
(50,518)
74,857 $
5,221 $
(3,754)
—
—
—
1,467
(1,428)
—
—
—
39 $
2,819 $
2,615
—
4,823
—
10,257
(460)
—
2,630
—
12,427 $
—
1,161
—
—
—
1,161
(326)
—
—
—
835
Interest income and dividends from the TPS securities are recorded as a component of interest income. Interest expense related to the junior
subordinated debentures is measured based on contractual interest rates and reported in interest expense. The change in fair value of the
junior subordinated debentures, which represents changes in instrument specific credit risk, is recorded in other comprehensive income. The
change in fair value of the investment in limited partnerships and the SBA servicing asset are recorded as a component of non-interest
income.
Items Measured at Fair Value on a Non-recurring Basis
The following tables present financial assets and liabilities measured at fair value on a non-recurring basis and the level within the fair value
hierarchy of the fair value measurements for those assets at December 31, 2022 and 2021 (in thousands):
Loans individually evaluated
REO
Loans held for sale
Loans individually evaluated
REO
Level 1
December 31, 2022
Level 2
Level 3
— $
—
—
— $
—
49,474
1,883 $
340
—
Total
1,883
340
49,474
December 31, 2021
Level 1
Level 2
Level 3
Total
— $
—
— $
—
2,989 $
852
2,989
852
$
$
The following table presents the losses resulting from non-recurring fair value adjustments for the years ended December 31, 2022, 2021 and
2020 (in thousands):
Loans individually evaluated
REO
Loans held for sale
Total loss from non-recurring measurements
For the years ended December 31,
2021
2022
2020
(626) $
—
(2,538)
(3,164) $
(303) $
—
—
(303) $
(3,482)
(45)
—
(3,527)
$
$
134
Loans individually evaluated: Expected credit losses for loans evaluated individually are measured based on the present value of expected
future cash flows discounted at the loan’s original effective interest rate or when the Bank determines that foreclosure is probable, the
expected credit loss is measured based on the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. As
a practical expedient, the Bank measures the expected credit loss for a loan using the fair value of the collateral, if repayment is expected to be
provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the
Bank’s assessment as of the reporting date. In both cases, if the fair value of the collateral is less than the amortized cost basis of the loan, the
Bank will recognize an allowance as the difference between the fair value of the collateral, less costs to sell (if applicable) at the reporting
date and the amortized cost basis of the loan. If the fair value of the collateral exceeds the amortized cost basis of the loan, any expected
recovery added to the amortized cost basis will be limited to the amount previously charged-off by the subsequent changes in the expected
credit losses for loans evaluated individually are included within the provision for credit losses in the same manner in which the expected
credit loss initially was recognized or as a reduction in the provision that would otherwise be reported.
REO: The Company records REO (acquired through a lending relationship) at fair value on a non-recurring basis. Fair value adjustments on
REO are based on updated real estate appraisals which are based on current market conditions. All REO properties are recorded at the lower
of the estimated fair value of the real estate, less expected selling costs, or the carrying amount of the defaulted loans. From time to time,
non-recurring fair value adjustments to REO are recorded to reflect partial write-downs based on an observable market price or current
appraised value of property. Banner considers any valuation inputs related to REO to be Level 3 inputs. The individual carrying values of
these assets are reviewed for impairment at least annually and any additional impairment charges are expensed to operations.
Loans held for sale: The multifamily held for sale loans are carried at the lower of cost or market value. Lower of cost or market adjustments
for multifamily loans held for sale are calculated based on discounted cash flows using a discount rate that is a combination of market spreads
for similar loan types added to selected index rates. If the fair value of the multifamily held for sale loans is lower than the amortized cost
basis of the loans, a net unrealized loss is recognized through the valuation allowance by charges to income.
Note 17: BANNER CORPORATION (PARENT COMPANY ONLY)
Summary financial information is as follows (in thousands):
Statements of Financial Condition
ASSETS
Cash
Investment in trust equities
Investment in subsidiaries
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Miscellaneous liabilities
Deferred tax liability, net
Subordinated notes, net
Junior subordinated debentures at fair value
Shareholders’ equity
Total liabilities and shareholders’ equity
Statements of Operations
INTEREST INCOME:
Interest-bearing deposits
OTHER INCOME (EXPENSE):
Dividend income from subsidiaries
Equity in undistributed income of subsidiaries
Other income
Interest on other borrowings
Other expenses
Net income before taxes
BENEFIT FROM INCOME TAXES
NET INCOME
135
December 31
2022
2021
77,457 $
2,678
1,549,918
11,651
1,641,704 $
8,925 $
2,543
98,947
74,857
1,456,432
1,641,704 $
106,329
4,196
1,801,764
5,877
1,918,166
5,723
3,737
98,564
119,815
1,690,327
1,918,166
$
$
$
$
Years Ended December 31
2021
2022
2020
$
$
80 $
97 $
112
101,931
104,391
96
(8,400)
(6,092)
192,006
99,788
112,814
146
(8,780)
(7,391)
196,674
(3,372)
195,378 $
(4,374)
201,048 $
87,748
36,401
62
(7,204)
(3,530)
113,589
(2,339)
115,928
Statements of Cash Flows
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed income of subsidiaries
(Decrease) increase in deferred taxes
Net change in valuation of financial instruments carried at fair value
Share-based compensation
Loss on extinguishment of debt
Net change in other assets
Net change in other liabilities
Net cash provided from operating activities
INVESTING ACTIVITIES:
Other investing activities
Reduction in investment in subsidiaries
Net cash used by investing activities
FINANCING ACTIVITIES:
Net proceeds from issuance of subordinated notes
Repayment of junior subordinated debentures
Proceeds from redemption of trust securities related to junior subordinated
debentures
Taxes paid related to net share settlement for equity awards
Repurchase of common stock
Cash dividends paid
Net cash used by financing activities
NET CHANGE IN CASH
CASH, BEGINNING OF PERIOD
CASH, END OF PERIOD
Note 18: STOCK REPURCHASES
Years Ended December 31
2021
2022
2020
$
195,378 $
201,048 $
115,928
(104,391)
(43)
(56)
8,870
765
(4,169)
3,765
100,119
(1,549)
(3,072)
(4,621)
—
(50,518)
1,518
(3,332)
(10,960)
(61,078)
(112,814)
(571)
55
9,258
2,284
(2,970)
4,050
100,340
(228)
—
(228)
—
(8,248)
248
(3,228)
(56,528)
(57,621)
(124,370)
(28,872)
106,329
77,457 $
(125,377)
(25,265)
131,594
106,329 $
$
(36,401)
1,438
—
9,168
—
16,756
(235)
106,654
(38)
—
(38)
98,027
—
—
(1,453)
(31,775)
(94,078)
(29,279)
77,337
54,257
131,594
On March 27, 2019 the Company announced that its Board of Directors had authorized the repurchase up to 5% of the Company’s common
stock, or 1,757,637 of the Company’s outstanding shares. Under the authorization, shares could be repurchased by the Company in open
market purchases. There were 624,780 shares repurchased in the first quarter of 2020 under the 2019 authorization at an average price of
$50.84 per share. This authorization expired in March 2020.
On December 21, 2020, the Company announced that its Board of Directors had authorized the repurchase up to 1,757,781 shares, or
approximately 5% of the Company’s outstanding common stock. Under the authorization, shares could be repurchased by the Company in
open market purchases. During 2020, no shares were repurchased under the 2020 authorization. In addition to the shares repurchased under
the 2019 authorization, there were 41,507 shares surrendered during 2020 by employees to satisfy tax withholding obligations upon vesting of
restricted stock. There were 1,050,000 shares repurchased during 2021, under the 2020 authorization at an average price of $53.84 per share.
This authorization expired in December 2021.
On December 22, 2021, the Company announced that its Board of Directors had authorized the repurchase of up to 1,712,510 shares, or
approximately 5%, of the Company’s outstanding common stock. Under the authorization, shares could be repurchased by the Company in
open market purchases. The extent to which the Company repurchases its shares and the timing of such repurchases will depend upon market
conditions and other corporate considerations. During the year ended December 31, 2021, no shares were repurchased under the 2021
authorization. There were 59,730 shares surrendered during 2021 by employees to satisfy tax withholding obligations upon vesting of
restricted stock and settlement of restricted stock units. There were 200,000 shares repurchased during 2022, under the 2021 authorization at
an average price of $54.77 per share, leaving 1,512,510 available for future repurchase. In addition to the shares repurchased under the 2021
authorization, there were 55,228 shares surrendered during 2022 by employees to satisfy tax withholding obligations upon vesting of
restricted stock. This authorization expired in December 2022.
136
Note 19: CALCULATION OF EARNINGS PER COMMON SHARE
The following table reconciles basic to diluted weighted average shares outstanding used to calculate earnings per share data (dollars in
thousands, except per share data):
Net income
Basic weighted average shares outstanding
Dilutive effect of unvested restricted stock
Diluted weighted shares outstanding
Earnings per common share
Basic
Diluted
Years Ended December 31
2021
2022
2020
$
195,378 $
201,048 $
115,928
34,264,322
195,600
34,459,922
34,610,056
309,132
34,919,188
35,264,252
264,596
35,528,848
$
$
5.70 $
5.67 $
5.81 $
5.76 $
3.29
3.26
Note 20: COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk - The Company has financial instruments with off-balance-sheet risk generated in the
normal course of business to meet the financing needs of its clients. These financial instruments include commitments to extend credit,
commitments related to standby letters of credit, commitments to originate loans, commitments to sell loans, and commitments to buy or sell
securities. These instruments involve, to varying degrees, elements of credit and interest rate risk similar to the risk involved in on-balance
sheet items recognized in our Consolidated Statements of Financial Condition.
Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument from commitments to extend credit
and standby letters of credit is represented by the contractual notional amount of those instruments. We use the same credit policies in
making commitments and conditional obligations as for on-balance sheet instruments.
Outstanding commitments for which no asset or liability for the notional amount has been recorded consisted of the following at the dates
indicated (in thousands):
Commitments to extend credit
Standby letters of credit and financial guarantees
Commitments to originate loans
Risk participation agreements
Contract or Notional Amount
December 31, 2022
$
4,031,954 $
26,119
53,266
48,566
December 31, 2021
3,527,143
21,830
106,609
40,064
Derivatives also included in Note 21:
Commitments to originate loans held for sale
Commitments to sell loans secured by one- to four-family residential properties
Commitments to sell securities related to mortgage banking activities
10,525
12,568
7,000
106,590
27,006
127,580
In addition to the commitments disclosed in the table above, the Company is committed to funding its unfunded tax credit investments, as
discussed previously in Note 11, Income Taxes. The Company has also entered into agreements to invest in several limited partnerships. As
of December 31, 2022 and December 31, 2021, the funded balances and remaining outstanding commitments of these investments were as
follows (in thousands):
December 31, 2022
December 31, 2021
Limited partnerships investments
$
10,272 $
12,228 $
Funded Balance
Unfunded Balance
Funded Balance
Unfunded Balance
9,858
7,642 $
Commitments to extend credit are agreements to lend to a client, as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Many of the
commitments may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash
requirements. Each client’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary
upon extension of credit, is based on management’s credit evaluation of the client. Collateral held varies, but may include accounts
receivable, inventory, property, plant and equipment, and income producing commercial properties. The Company’s allowance for credit
losses - unfunded loan commitments was $14.7 million and $12.4 million, at December 31, 2022 and 2021, respectively.
137
Standby letters of credit are conditional commitments issued to guarantee a client’s performance or payment to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. Under a risk participation
agreement, the Bank guarantees the financial performance of a borrower on the participated portion of an interest rate swap on a loan.
Interest rates on residential one- to four-family mortgage loan applications are typically rate locked (committed) to clients during the
application stage for periods ranging from 30 to 60 days, the most typical period being 45 days. Traditionally, these loan applications with
rate lock commitments had the pricing for the sale of these loans locked with various qualified investors under a best-efforts delivery program
at or near the time the interest rate is locked with the client. The Bank then attempts to deliver these loans before their rate locks expired.
This arrangement generally required delivery of the loans prior to the expiration of the rate lock. Delays in funding the loans would require a
lock extension. The cost of a lock extension at times was borne by the client and at times by the Bank. These lock extension costs have not
had a material impact to the Company’s operations. For mandatory delivery commitments the Company enters into forward commitments at
specific prices and settlement dates to deliver either: (1) residential mortgage loans for purchase by secondary market investors (i.e., Freddie
Mac or Fannie Mae), or (2) mortgage-backed securities to broker/dealers. The purpose of these forward commitments is to offset the
movement in interest rates between the execution of its residential mortgage rate lock commitments with borrowers and the sale of those loans
to the secondary market investor. There were no counterparty default losses on forward contracts during 2022 or 2021. Market risk with
respect to forward contracts arises principally from changes in the value of contractual positions due to changes in interest rates. The
Company limits its exposure to market risk by monitoring differences between commitments to clients and forward contracts with market
investors and securities broker/dealers. In the event the Company has forward delivery contract commitments in excess of available mortgage
loans, the transaction is completed by either paying or receiving a fee to or from the investor or broker/dealer equal to the increase or decrease
in the market value of the forward contract. Changes in the value of rate lock commitments are recorded as assets and liabilities.
In the normal course of business, the Company and/or its subsidiaries have various legal proceedings and other contingent matters
outstanding. These proceedings and the associated legal claims are often contested and the outcome of individual matters is not always
predictable. These claims and counter-claims typically arise during the course of collection efforts on problem loans or with respect to action
to enforce liens on properties in which the Bank holds a security interest. Based upon the information known to management at this time, the
Company has accrued $14.8 million related to outstanding legal proceedings. There are no other legal proceedings that management believes
would have a material adverse effect on the results of operations or consolidated financial position at December 31, 2022.
In connection with certain asset sales, the Bank typically makes representations and warranties about the underlying assets conforming to
specified guidelines. If the underlying assets do not conform to the specifications, the Bank may have an obligation to repurchase the assets
or indemnify the purchaser against any loss. The Bank believes that the potential for material loss under these arrangements is
remote. Accordingly, the fair value of such obligations is not material.
Note 21: DERIVATIVES AND HEDGING
The Company, through its Banner Bank subsidiary, is party to various derivative instruments that are used for asset and liability management
and client financing needs. Derivative instruments are contracts between two or more parties that have a notional amount and an underlying
variable, require no net investment and allow for the net settlement of positions. The notional amount serves as the basis for the payment
provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents a specified interest rate,
index, or other component. The interaction between the notional amount and the underlying variable determines the number of units to be
exchanged between the parties and influences the market value of the derivative contract.
The Company’s predominant derivative and hedging activities involve interest rate swaps related to certain term loans and forward sales
contracts associated with mortgage banking activities. Generally, these instruments help the Company manage exposure to market risk and
meet client financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by
fluctuations in external factors such as market-driven interest rates and prices or other economic factors.
138
As of December 31, 2022 and December 31, 2021, the notional values or contractual amounts and fair values of the Company’s derivatives
were as follows (in thousands):
Asset Derivatives
Liability Derivatives
December 31, 2021
December 31, 2022
Notional/
Contract
Amount
Fair
Value
$
— $
(1)
— $
Notional/
Contract
Amount
December 31, 2022
Notional/
Contract
Amount
Fair Value
(1)
Fair Value
(2)
— $ 400,000 $ 26,485 $ 400,000 $
— $
Fair Value
(2)
Notional/
Contract
Amount
December 31, 2021
440,731
37,119
551,606
20,826
440,731
37,150
551,606
(17,780)
—
19,339
(17,780)
(8,705)
37,150
—
—
1,283
15,920
—
66
74
$ 474,502 $ 19,481 $ 695,678 $ 22,381 $ 503,381 $ 37,335 $ 676,435 $ 11,476
47,283
12,367
87,986
16,568
98,500
56,086
26,329
1,467
3,000
81
—
67
42
—
76
61
88
279
11,336
Hedged interest rate swaps
Interest rate swaps not
designated in hedge
relationships
Less: Master netting
agreements
Less: Cash settlements
Net interest rate swaps
Risk participation agreements
Mortgage loan commitments
Forward sales contracts
Total
(1)
(2)
Included in Other assets on the Consolidated Statements of Financial Condition.
Included in Accrued expenses and other liabilities on the Consolidated Statements of Financial Condition.
Derivatives Designated in Hedge Relationships
Interest Rate Swaps used in Cash Flow Hedges: The Company’s floating rate loans result in exposure to losses in value or net interest income
as interest rates change. The risk management objectives in using interest rate derivatives are to reduce volatility in net interest income and to
manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its
interest rate risk management strategy. During the fourth quarter of 2021, the Company entered into interest rate swaps designated as cash
flow hedges to hedge the variable cash flows associated with existing floating rate loans. These hedge contracts involve the receipt of fixed-
rate amounts from a counterparty in exchange for the Company making floating-rate payments over the life of the agreements without
exchange of the underlying notional amount.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the unrealized gain or loss on the derivative is recorded in
AOCI and subsequently reclassified into interest income in the same period during which the hedged transaction affects earnings. Amounts
reported in AOCI related to derivatives will be reclassified to interest income as interest payments are made on the Company’s variable-rate
assets. During the next twelve months, the Company estimates that an additional $15.7 million will be reclassified as a decrease to interest
income.
The following table presents the effect of cash flow hedge accounting on AOCI for the years ended December 31, 2022 and December 31,
2021 (in thousands):
For the Year Ended December 31, 2022
Amount of
Gain or (Loss)
Recognized in
AOCI on
Derivative
Amount of
Gain or (Loss)
Recognized in
AOCI Included
Component
Amount of
Gain or (Loss)
Recognized in
AOCI
Excluded
Component
Location of
Gain or (Loss)
Recognized
from AOCI
into Income
Amount of
Gain or (Loss)
Reclassified
from AOCI
into Income
Amount of
Gain or (Loss)
Reclassified
from AOCI
into Income
Included
Component
Amount of
Gain or (Loss)
Reclassified
from AOCI
into Income
Excluded
Component
Interest rate
swaps
$
(28,418) $
(28,418) $
—
Interest Income $
(3,195) $
(3,195) $
—
139
For the Year Ended December 31, 2021
Amount of
Gain or (Loss)
Recognized in
AOCI on
Derivative
Amount of
Gain or (Loss)
Recognized in
AOCI Included
Component
Amount of
Gain or (Loss)
Recognized in
AOCI
Excluded
Component
Location of
Gain or (Loss)
Recognized
from AOCI
into Income
Amount of
Gain or (Loss)
Reclassified
from AOCI
into Income
Amount of
Gain or (Loss)
Reclassified
from AOCI
into Income
Included
Component
Amount of
Gain or (Loss)
Reclassified
from AOCI
into Income
Excluded
Component
Interest rate
swaps
$
(920) $
(920) $
—
Interest Income $
340 $
340 $
—
At December 31, 2022 and December 31, 2021, we had recorded total net unrealized losses on cash flow hedges in AOCI, net of taxes of
$20.1 million and $958,000, respectively.
Derivatives Not Designated in Hedge Relationships
Interest Rate Swaps: The Bank uses an interest rate swap program for commercial loan clients, that provides the client with a variable-rate
loan and enters into an interest rate swap in which the client receives a variable-rate payment in exchange for a fixed-rate payment. The Bank
offsets its risk exposure by entering into an offsetting interest rate swap with a dealer counterparty for the same notional amount and length of
term as the client interest rate swap providing the dealer counterparty with a fixed-rate payment in exchange for a variable-rate payment.
These swaps do not qualify as designated hedges; therefore, each swap is accounted for as a freestanding derivative.
Risk Participation Agreements: In conjunction with the purchase or sale of participating interests in loans, the Company also participates in
related swaps through risk participation agreements. The existing credit derivatives resulting from these participations are not designated as
hedges as they are not used to manage interest rate risk in the Company’s assets or liabilities and are not speculative.
Mortgage Loan Commitments: The Company sells originated one- to four-family mortgage loans into the secondary mortgage loan markets.
During the period of loan origination and prior to the sale of the loans in the secondary market, the Company has exposure to movements in
interest rates associated with written interest rate lock commitments with potential borrowers to originate one- to four-family loans that are
intended to be sold and for closed one- to four-family mortgage loans held for sale for which fair value accounting has been elected, that are
awaiting sale and delivery into the secondary market. The Company economically hedges the risk of changing interest rates associated with
these mortgage loan commitments by entering into forward sales contracts to sell one- to four-family mortgage loans or mortgage-backed
securities to broker/dealers at specific prices and dates.
Gains (losses) recognized in income within Mortgage banking operations on non-designated hedging instruments for the years ended
December 31, 2022, 2021 and 2020 were as follows (in thousands):
Mortgage loan commitments
Forward sales contracts
For the Years Ended December 31
2022
(1,427) $
84
(1,343) $
2021
(3,754) $
1,243
(2,511) $
2020
4,430
(1,334)
3,096
$
$
The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to these agreements. Credit risk of the
financial contract is controlled through the credit approval, limits, and monitoring procedures and management does not expect the
counterparties to fail their obligations.
In connection with the interest rate swaps between the Bank and the dealer counterparties, the agreements contain a provision where if the
Bank fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions and
the Bank would be required to settle its obligations. Similarly, the Bank could be required to settle its obligations under certain of its
agreements if specific regulatory events occur, such as a publicly issued prompt corrective action directive, cease and desist order, or a capital
maintenance agreement that required the Bank to maintain a specific capital level. If the Bank had breached any of these provisions at
December 31, 2022 or December 31, 2021, it could have been required to settle its obligations under the agreements at the termination value.
As of December 31, 2022, the Company had no obligations to dealer counterparties related to these agreements. As of December 31, 2021,
the termination value of derivatives in a net liability position related to these agreements was $24.9 million. The Company generally posts
collateral against derivative liabilities in the form of cash, government agency-issued bonds, mortgage-backed securities, or commercial
mortgage-backed securities. Collateral posted against derivative liabilities was $22.2 million and $45.8 million as of December 31, 2022 and
2021, respectively. The collateral posted included restricted cash of $15.9 million and $21.6 million as of December 31, 2022 and 2021,
respectively.
140
Derivative assets and liabilities are recorded at fair value on the balance sheet. Master netting agreements allow the Company to settle all
derivative contracts held with a single counterparty on a net basis and to offset net derivative positions with related collateral where
applicable. In addition, some of interest rate swap derivatives between the Bank and the dealer counterparties are cleared through central
clearing houses. These clearing houses characterize the variation margin payments as settlements of the derivative’s market exposure and not
as collateral. The variation margin is treated as an adjustment to our cash collateral, as well as a corresponding adjustment to our derivative
liability. As of December 31, 2022 and December 31, 2021, the variation margin adjustment was a negative adjustment of $8.7 million and
$10.7 million, respectively.
The following presents additional information related to the Company’s interest rate swaps, both designated and non-designated as hedged, as
of December 31, 2022 and December 31, 2021 (in thousands):
December 31, 2022
Gross Amounts of Financial
Instruments Not Offset in the
Consolidated Statement of
Financial Condition
Gross
Amounts
Recognized
Amounts
offset in the
Statement of
Financial
Condition
Net Amounts
in the
Statement of
Financial
Condition
Netting
Adjustment Per
Applicable
Master Netting
Agreements
Fair Value of
Financial
Collateral in the
Statement of
Financial
Condition
Net Amount
$
$
$
$
37,119 $
37,119 $
(17,780) $
(17,780) $
19,339 $
19,339 $
63,634 $
63,634 $
(26,484) $
(26,484) $
37,150 $
37,150 $
— $
— $
— $
— $
— $
— $
19,339
19,339
(14,972) $
(14,972) $
22,178
22,178
December 31, 2021
Gross Amounts of Financial
Instruments Not Offset in the
Consolidated Statement of
Financial Condition
Gross
Amounts
Recognized
Amounts
offset in the
Statement of
Financial
Condition
Net Amounts
in the
Statement of
Financial
Condition
Netting
Adjustment Per
Applicable
Master Netting
Agreements
Fair Value of
Financial
Collateral in the
Statement of
Financial
Condition
Net Amount
$
$
$
$
20,826 $
20,826 $
— $
— $
20,826 $
20,826 $
11,615 $
11,615 $
— $
— $
11,615 $
11,615 $
— $
— $
— $
— $
— $
— $
20,826
20,826
(9,669) $
(9,669) $
1,946
1,946
Derivative assets
Interest rate swaps
Derivative liabilities
Interest rate swaps
Derivative assets
Interest rate swaps
Derivative liabilities
Interest rate swaps
141
Note 22: REVENUE FROM CONTRACTS WITH CLIENTS
Disaggregation of Revenue:
Deposit fees and other service charges for the years ended December 31, 2022, 2021 and 2020 are summarized as follows (in thousands):
Deposit service charges
Debit and credit card interchange fees
Debit and credit card expense
Merchant services income
Merchant services expense
Other service charges
Total deposit fees and other service charges
Deposit fees and other service charges
Years Ended December 31
2021
2020
2022
23,710
23,766
(11,487)
15,551
(12,754)
5,673
44,459
19,162
23,271
(10,636)
14,973
(12,084)
4,809
39,495
16,428
20,052
(9,098)
12,554
(10,042)
4,490
34,384
Deposit fees and other service charges include transaction and non-transaction based deposit fees. Transaction based fees on deposit accounts
are charged to deposit clients for specific services provided to the client. These fees include such items as wire fees, official check fees, and
overdraft fees. These are contract specific to each individual transaction and do not extend beyond the individual transaction. The
performance obligation is completed and the fees are recognized at the time the specific transactional service is provided to the client. Non-
transactional deposit fees are typically monthly account maintenance fees charged on deposit accounts. These are day-to-day contracts that
can be canceled by either party without notice. The performance obligation is satisfied and the fees are recognized on a monthly basis after
the service period is completed.
Debit and credit card interchange income and expenses
Debit and credit card interchange income represent fees earned when a credit or debit card issued by the Bank is used to purchase goods or
services at a merchant. The merchant’s bank pays the Bank a default interchange rate set by MasterCard on a transaction by transaction basis.
The merchant acquiring bank can stop accepting the Bank’s cards at any time and the Bank can stop further use of cards issued by them at any
time. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the Bank’s cardholders’
card. Direct expenses associated with the credit and debit card are recorded as a net reduction against the interchange income.
Merchant services income
Merchant services income represents fees earned by the Bank for card payment services provided to its merchant clients. The Bank has a
contract with a third party to provide card payment services to the Bank’s merchants that contract for those services. The third party provider
has contracts with the Bank’s merchants to provide the card payment services. The Bank does not have a direct contractual relationship with
its merchants for these services. The Bank sets the rates for the services provided by the third party. The third party provider passes the
payments made by the Bank’s merchants through to the Bank. The Bank, in turn, pays the third party provider for the services it provides to
the Bank’s merchants. These payments to the third party provider are recorded as expenses as a net reduction against fee income. In addition,
a portion of the payment received by the Bank represents interchange fees which are passed through to the card issuing bank. Income is
primarily earned based on the dollar volume and number of transactions processed. The performance obligation is satisfied and the related
fee is earned when each payment is accepted by the processing network.
142
Note 23: LEASES
The Company leases 95 buildings and offices under non-cancelable operating leases. The leases contain various provisions for increases in
rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule. Substantially all of the
leases provide the Company with the option to extend the lease term one or more times following expiration of the initial term. The table
below presents the lease right-of-use assets and lease liabilities recorded on the balance sheet at December 31, 2022 and December 31, 2021
(dollars in thousands):
Assets
Operating right-of-use lease assets
Liabilities
Operating lease liabilities
Weighted-average remaining lease term
Operating leases
Weighted-average discount rate
Operating leases
$
$
December 31, 2022
December 31, 2021
49,283 $
55,257
55,205 $
59,756
5.1 years
5.5 years
3.0 %
2.8 %
The table below presents certain information related to the lease costs for operating leases for the years ended December 31, 2022, 2021 and
2020 (in thousands):
Operating lease cost
Short-term lease cost
Variable lease cost
Less sublease income
Total lease cost
(1)
Year Ended December 31,
2021
2022
2020
16,647 $
125
2,189
(1,126)
17,835 $
17,541 $
100
2,584
(904)
19,321 $
17,337
97
2,778
(946)
19,266
$
$
(1) Lease expenses and sublease income are classified within occupancy and equipment expense on the Consolidated Statements of
Operations.
Operating cash flows paid for operating lease amounts included in the measurement of lease liabilities were $15.4 million for the year ended
December 31, 2022 and $18.0 million for the year ended December 31, 2021. The Company recorded $9.3 million of right-of-use lease assets
in exchange for operating lease liabilities for the year ended December 31, 2022 and $16.7 million for the year ended December 31, 2021.
The table below reconciles the undiscounted cash flows for each of the first five years beginning with 2023 and the total of the remaining
years to the operating lease liabilities recorded on the Consolidated Statements of Financial Position (in thousands):
Operating Leases
2023
2024
2025
2026
2027
Thereafter
Total minimum lease payments
Less: amount of lease payments representing interest
Lease obligations
$
$
14,366
13,116
11,203
9,317
6,038
5,568
59,608
(4,403)
55,205
As of December 31, 2022, the Company had no undiscounted lease payments under an operating lease that had not yet commenced, compared
to $353,000 undiscounted lease payments under an operating lease that had not yet commenced at December 31, 2021.
143
BANNER CORPORATION
Exhibit
3{a}
Index of Exhibits
Restated Articles of Incorporation of Banner Corporation [incorporated by reference to Exhibit 3.1 (b) to the Registrant’s
Current Report on Form 8-K filed on May 24, 2022 (File No. 000-26584)].
3{b}
4.2
4.3
10{a}
10{b}
10{c}
10{d}
10{e}
10{f}
10{g}
10{h}
10{i}
10{j}
14
21
23.1
31.1
31.2
Amended and Restated Bylaws of Banner Corporation [incorporated by reference to Exhibit 3.2 to the Registrant’s Current
Report on Form 8-K filed with the SEC on May 24, 2022 (File No. 000-26584)]
Description of Capital Stock
Issuance of base indenture, first supplemental indenture and subordinated note [incorporated by reference to the exhibits filed
with Form 8-K on June 30, 2020 (File No. 000-26584)]
Amended and Restated Employment Agreement, with Mark J. Grescovich [incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed on June 4, 2013 (File No. 000-26584].
Form of Supplemental Executive Retirement Program Agreement with Gary Sirmon, Michael K. Larsen, Lloyd W. Baker,
Cynthia D. Purcell and Richard B. Barton [incorporated by reference to exhibits filed with the Annual Report on Form 10-K for
the year ended December 31, 2001 and the exhibits filed with the Form 8-K on May 6, 2008 (File No. 000-26584)].
Form of
entered into with Peter
reference to exhibits filed with the Form 8-K on June 25, 2014 (File No. 000-26584)].
Employment
Cynthia D.
Contract
Conner,
Purcell
J.
and Judith A.
Steiner
[incorporated by
2005 Executive Officer and Director Stock Account Deferred Compensation Plan [incorporated by reference to exhibits filed
with the Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 000-26584)].
Entry into an Indemnification Agreement
the Form 8-K on January 29, 2010 (File No. 000-26584)].
with each of
the Registrant’s Directors [incorporated by reference to exhibits filed with
Amended and Restated Executive Severance and Change in Control
Restated effective as of October 1, 2021) [incorporated by reference to exhibit 10{j} included in the Form 10-Q dated September
30, 2021 (File No. 000-26584)]
2014 Omnibus Incentive Plan [incorporated by reference as Appendix C to the Registrant’s Definitive Proxy Statement on
Schedule 14A filed on March 24, 2014 (File No. 000-26584)] and amendments [incorporated by reference to the Form 8-K filed
on March 25, 2015 (File No. 000-26534)].
Plan and Summary Plan Description (Amended and
Forms of
Equity-Based Award Agreements: Incentive Stock Option Award Agreement, Non-Qualified Stock Option Award
Agreement, Restricted Stock Award Agreement, Restricted Stock Unit Award Agreement, Stock Appreciation Right Award
Agreement, and Performance Unit Award Agreement [incorporated by reference to Exhibits 10.2 - 10.7 included in the
Registration Statement on Form S-8 dated May 9, 2014 (File No. 333-195835)].
2018 Omnibus Incentive Plan [incorporated by reference as Appendix D to the Registrant’s Definitive Proxy Statement on
Schedule 14A filed on March 23, 2018 (File No. 000-26584)]
Equity-Based Award Agreements: Incentive Stock Option Award Agreement,
Forms of
Non-Qualified Stock Option Award
Agreement under the Banner Corporation 2018 Omnibus Incentive Plan; Director Restricted Stock Award Agreement; Director
Restricted Stock Unit Award Agreement; Employee Time-based Restricted Stock Unit Award Agreement; Employee
performance-based Restricted Stock Unit Award Agreement; Stock Appreciation Right Award Agreement; and Performance
Unit Award Agreement [incorporated by reference to Exhibits 10.2 - 10.9 included in the Registration Statement on Form S-8
dated May 4, 2018 (File No. 333-224693)]
Code of
www.bannerbank.com in the section titled Corporate Overview: Governance Document
Ethics [Registrant elects to satisfy Regulation S-K §229.406(c) by posting its Code of Ethics on its website at
Subsidiaries of the Registrant.
Consent of Registered Independent Public Accounting Firm – Moss Adams LLP.
Certification of Chief Executive Officer pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to the Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
101.SCH
Inline XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are
embedded within the XBRL document.
Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
144
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, formatted in Inline
XBRL (included in Exhibit 101)
145
EXHIBIT 4.2
DESCRIPTION OF CAPITAL STOCK
The following information summarizes certain features and rights of our capital stock. The summary does not purport to be exhaustive and is
qualified in its entirety by reference to our articles of incorporation, bylaws, and to applicable Washington law.
General
Banner’s authorized capital stock consists of:
•
•
•
50,000,000 shares of common stock, $0.01 par value per share;
5,000,000 shares of non-voting common stock, $0.01 par value per share; and
500,000 shares of preferred stock, $0.01 par value per share.
As of January 31, 2023, there were 34,194,105 shares of Banner common stock issued and outstanding. No shares of Banner non-voting
common stock and no shares of Banner preferred stock are currently outstanding. Banner’s common stock is traded on NASDAQ under the
symbol “BANR.”
Common Stock
Each share of Banner common stock has the same relative rights and is identical in all respects with each other share of Banner common
stock. Banner common stock represents non-withdrawable capital, is not of an insurable type and is not insured by the FDIC or any other
government agency.
Subject to any prior rights of the holders of any preferred or other stock of Banner then outstanding, holders of Banner common stock are
entitled to receive such dividends as are declared by the board of directors of Banner out of funds legally available for dividends.
Except with respect to greater than 10% stockholders, full voting rights are vested in the holders of Banner common stock and each share is
entitled to one vote. See “—Anti-Takeover Effects—Restrictions on Voting Rights.” Subject to any prior rights of the holders of any Banner
preferred stock then outstanding, in the event of a liquidation, dissolution or winding up of Banner, holders of shares of Banner common stock
will be entitled to receive, pro rata, any assets distributable to stockholders in respect of shares held by them. Holders of shares of Banner
common stock will not have any preemptive rights to subscribe for any additional securities which may be issued by Banner, nor do they have
cumulative voting rights.
Nonvoting Common Stock
The holders of Banner nonvoting common stock have no voting rights except as required by the Washington Business Corporations Act,
which we refer to as the “WBCA,” and as described in the next sentence. In addition to any other vote required by law, the affirmative vote of
the holders of a majority of the outstanding shares of Banner nonvoting common stock, voting separately as a class, is required to amend
Banner’s articles of incorporation to alter or change the designation, preferences, limitations or relative rights of all or part of the shares of
Banner nonvoting common stock.
Except with respect to voting, Banner nonvoting common stock and Banner common stock have the same rights, preferences and privileges,
share ratably in all assets of the corporation upon its liquidation, dissolution or winding-up, are entitled to receive dividends (other than
certain stock dividends described in the next sentence) in the same amount per share and at the same time, as and if declared by Banner’s
board of directors, and are equal and identical in all other respects as to all other matters. In the event of any stock dividend having the effect
of a stock split, stock combination or other reclassification of shares of either the Banner common stock or the Banner nonvoting common
stock, the outstanding shares of the other class will be proportionately split, combined or reclassified in a similar manner, except that holders
of Banner common stock will receive only shares of Banner common stock in respect of their shares of Banner common stock and holders of
Banner nonvoting common stock will receive only shares of Banner nonvoting common stock in respect of their shares of Banner nonvoting
common stock.
No transfer of shares of Banner nonvoting common stock by the initial holders of those shares (or such holders’ affiliates) is permitted, except
for specified permitted transfers or transfers to affiliates of the initial holders of the nonvoting common stock. Each share of nonvoting
common stock will be converted automatically into one share of common stock upon a permitted transfer.
146
In the event of any merger, consolidation, reclassification or other transaction in which the shares of Banner common stock are exchanged for
or changed into other stock or securities, cash and/or any other property, each share of Banner nonvoting common stock will simultaneously
be similarly exchanged or changed into an amount per whole share equal to the aggregate amount of stock, securities, cash and/or any other
property that such Banner nonvoting common stock would be entitled to receive if it were converted into a share of Banner common stock
immediately prior to such transaction. In case of any offer to repurchase shares, pro rata subscription offer, rights offer or similar offer to
holders of Banner common stock, Banner is required to provide the holders of Banner nonvoting common stock the right to participate.
Preferred Stock
Our Articles of Incorporation permit our board of directors to authorize the issuance of up to 500,000 shares of preferred stock, par value
$0.01, in one or more series, at such time or times and for such consideration as the board of directors of Banner may determine, without
stockholder action. The board of directors of Banner is expressly authorized at any time, and from time to time, to issue Banner preferred
stock, with such voting and other powers, liquidation preferences and participating, optional or other special rights, and qualifications,
limitations or restrictions, as are stated and expressed in the board resolution providing for the issuance. The board of directors of Banner is
authorized to designate the series and the number of shares comprising such series, the dividend rate on the shares of such series, the
redemption rights, if any, any purchase, retirement or sinking fund provisions, any conversion rights and any voting rights. The ability of
Banner’s board of directors to approve the issuance of preferred or other stock without stockholder approval could dilute the voting power or
other rights or adversely affect the market value of our common stock and may make an acquisition by an unwanted suitor of a controlling
interest in Banner more difficult, time-consuming or costly, or otherwise discourage an attempt to acquire control of Banner.
Shares of preferred stock redeemed or acquired by Banner may return to the status of authorized but unissued shares, without designation as
to series, and may be reissued by Banner upon approval of its board of directors.
Anti-Takeover Effects
The provisions of our Articles of Incorporation, our Bylaws, and Washington law summarized in the following paragraphs may have anti-
takeover effects and could delay, defer, or prevent a tender offer or takeover attempt that a stockholder might consider to be in such
stockholder’s best interest, including those attempts that might result in a premium over the market price for the shares held by stockholders,
and may make removal of the incumbent management and directors more difficult.
Authorized Shares. Our Articles of Incorporation authorize the issuance of 50,000,000 shares of common stock, 5,000,000 shares of non-
voting common stock and 500,000 shares of preferred stock. These shares of common stock and preferred stock provide our board of directors
with as much flexibility as possible to effect, among other transactions, financings, acquisitions, stock dividends, stock splits and the exercise
of employee stock options. However, these additional authorized shares may also be used by the board of directors consistent with its
fiduciary duty to deter future attempts to gain control of us. The board of directors also has sole authority to determine the terms of any one or
more series of preferred stock, including voting rights, conversion rates and liquidation preferences. As a result of the ability to fix voting
rights for a series of preferred stock, the board of directors has the power to the extent consistent with its fiduciary duty to issue a series of
preferred stock to persons friendly to management in order to attempt to block a tender offer, merger or other transaction by which a third
party seeks control of us, and thereby assist members of management to retain their positions.
Restrictions on Voting Rights. Our Articles of Incorporation provide for restrictions on voting rights of shares owned in excess of 10% of any
class of our equity securities. Specifically, our Articles of Incorporation provide that if any person or group acting in concert acquires the
beneficial ownership of more than 10% of any class of our equity securities without the prior approval by a two-thirds vote of our
“Continuing Directors,” (as defined therein) then, with respect to each vote in excess of 10% of the voting power of our outstanding shares of
voting stock which such person would otherwise have been entitled to cast, such person is entitled to cast only one-hundredth of one vote per
share. Exceptions from this limitation are provided for, among other things, any proxy granted to one or more of our “Continuing Directors”
and for our employee benefit plans. Under our Articles of Incorporation, the restriction on voting shares beneficially owned in violation of the
foregoing limitations is imposed automatically, and the Articles of Incorporation provide that a majority of our Continuing Directors have the
power to construe the forgoing restrictions and to make all determinations necessary or desirable to implement these restrictions. These
restrictions would, among other things, restrict voting power of a beneficial owner of more than 10% of our outstanding shares of common
stock in a proxy contest or on other matters on which such person is entitled to vote.
Board of Directors. Our board of directors historically has been divided into three classes, each of which contains approximately one-third of
the members of the board of directors. The members of each class historically have been elected for a term of three years, with the terms of
office of all members of one class expiring each year so that approximately one-third of the total number of directors is elected each year. The
classification of directors, together with the provisions in our Articles of Incorporation described below that limit the ability of stockholders to
remove directors and that permit only the remaining directors to fill any vacancies on the board of directors, have the effect of making it more
difficult for stockholders to change the composition of the board of directors. As a result, at least two annual meetings of stockholders would
be required for the stockholders to change a majority of the directors, whether or not a change in the board of directors would be beneficial
and whether or not a majority of stockholders believe that such a change would be desirable. However, following approval by our board of
directors and/or our stockholders, as applicable, our Articles of Incorporation and our Bylaws were amended in May 2022 to eliminate
staggered terms for directors and provide for the annual election of all directors. The transition to a declassified board structure is being
147
effected over time such that each director will be elected annually upon expiration of the director’s term, beginning with directors whose
terms are expiring at the 2023 annual meeting of stockholders, and all directors will be subject to annual elections beginning with the 2025
annual meeting of stockholders.
Our Articles of Incorporation provide that the size of the board of directors is not less than five or more than 25 as set in accordance with the
Bylaws. The Articles of Incorporation provide that any vacancy occurring in the board of directors, including a vacancy created by an
increase in the number of directors, will be filled by a vote of two-thirds of the directors then in office. Any director so chosen will hold
office for a term expiring at the next annual meeting of stockholders. The classified board of directors is intended to provide for continuity of
the board of directors and to make it more difficult and time consuming for a stockholder group to fully use its voting power to gain control of
the board of directors without the consent of incumbent members of the board of directors. The Articles of Incorporation further provide that a
director may be removed from the board of directors prior to the expiration of their term only for cause and only upon the vote of the holders
of 80% of the total votes eligible to be cast thereon. In the absence of this provision, the vote of the holders of a majority of the shares could
remove the entire board of directors, but only with cause, and replace it with persons of such holders’ choice.
Cumulative Voting, Special Meetings and Action by Written Consent. Our Articles of Incorporation do not provide for cumulative voting for
any purpose. Moreover, the Articles of Incorporation provide that special meetings of stockholders may be called only by our board of
directors or by a committee of the board of directors. In addition, our Bylaws require that any action taken by written consent must receive the
consent of all of the outstanding voting stock entitled to vote on the action taken.
Stockholder Vote Required to Approve Business Combinations with Principal Stockholders. The Articles of Incorporation require the approval
of the holders of (i) at least 80% of the outstanding shares entitled to vote thereon (and, if any class or series of shares is entitled to vote
thereon separately, the approval of the holders of at least 80% of the outstanding shares of each such class or series) and (ii) at least a majority
of the outstanding shares entitled to vote thereon, not including shares deemed beneficially owned by a “Related Person,” for certain
“Business Combinations” involving a Related Person, except in cases where the proposed transaction has been approved in advance by two-
thirds of those members of Banner’s board of directors who are unaffiliated with the Related Person and were directors prior to the time when
the Related Person became a Related Person. The term “Related Person” is defined to include any individual, corporation, partnership or other
entity (other than tax-qualified benefit plans of Banner) which owns beneficially or controls, directly or indirectly, 10% or more of the
outstanding shares of common stock of Banner or an affiliate of such person or entity. The term “Business Combination” is defined to
include: (i) any merger or consolidation of Banner with or into any Related Person; (ii) any sale, lease, exchange, mortgage, transfer, or other
disposition of 25% or more of the assets of Banner to a Related Person; (iii) any merger or consolidation of a Related Person with or into
Banner or a subsidiary of Banner; (iv) any sale, lease, exchange, transfer or other disposition of certain assets of a Related Person to Banner or
a subsidiary of Banner; (v) the issuance of any securities of Banner or a subsidiary of Banner to a Related Person; (vi) the acquisition by
Banner or a subsidiary of Banner of any securities of a Related Person; (vii) any reclassification of common stock of Banner or any
recapitalization involving the common stock of Banner; or (viii) any agreement or other arrangement providing for any of the foregoing.
Washington law imposes restrictions on certain transactions between a corporation and certain significant stockholders. Chapter 23B.19 of the
WBCA prohibits a “target corporation,” with certain exceptions, from engaging in certain “significant business transactions” with an
“Acquiring Person” who acquires 10% or more of the voting securities of a target corporation for a period of five years after such acquisition,
unless (a) the transaction or acquisition of shares is approved by a majority of the members of the target corporation’s board of directors prior
to the date of the acquisition or, (b) at or subsequent to the date of the acquisition, the transaction is approved by a majority of the members of
the target corporation’s board of directors and authorized at a stockholders’ meeting by the affirmative vote of at least two-thirds of the votes
entitled to be cast by the outstanding voting shares of the target corporation, excluding shares owned or controlled by the Acquiring Person.
The prohibited transactions include, among others, a merger or consolidation with, or issuance or redemption of stock to or from, the
Acquiring Person; the sale, lease, exchange, mortgage, pledge, transfer or other disposition or encumbrance of assets, to or with an Acquiring
Person, with an aggregate market value equal to five percent or more of the aggregate market value of the target corporation’s consolidated
assets, outstanding shares or consolidated net income; termination of 5% or more of the target corporation’s employees employed in
Washington state, as a result of the Acquiring Person’s acquisition of 10% or more of the target corporation’s shares; or allowing the
Acquiring Person to receive any disproportionate benefit as a stockholder. After the five-year period during which significant business
transactions are prohibited, certain significant business transactions may occur if certain “fair price” criteria or stockholder approval
requirements are met. Target corporations include all publicly-traded corporations incorporated under Washington law, as well as publicly
traded foreign corporations that meet certain requirements. This summary of certain WBCA provisions does not purport to be complete.
Amendment of Articles of Incorporation and Bylaws. Amendments to our Articles of Incorporation must be approved by our board of
directors by a majority vote of the board of directors and by our stockholders by a majority of the voting group comprising all the votes
entitled to be cast on the proposed amendment, and a majority of each other voting group entitled to vote separately on the proposed
amendment; provided, however, that the affirmative vote of the holders of at least 80% of votes entitled to be cast by each separate voting
group entitled to vote thereon (after giving effect to the provision limiting voting rights, if applicable) is required to amend or repeal certain
provisions of the Articles of Incorporation, including the provision limiting voting rights, the provisions relating to the removal of directors,
stockholder nominations and proposals, the approval of certain business combinations, calling special meetings, director and officer
indemnification by us and amendment of our Bylaws and Articles of Incorporation. Our Bylaws may be amended by a majority vote of our
board of directors, or by a vote of 80% of the total votes entitled to vote generally in the election of directors at a duly constituted meeting of
stockholders.
Stockholder Nominations and Proposals. Our Articles of Incorporation generally require a stockholder who intends to nominate a candidate
for election to the board of directors, or to raise new business at a stockholder meeting to give not less than 30 nor more than 60 days’
148
advance notice to the Secretary of Banner. The notice provision requires a stockholder who desires to raise new business to provide certain
information to us concerning the nature of the new business, the stockholder and the stockholder’s interest in the business matter. Similarly, a
stockholder wishing to nominate any person for election as a director must provide us with certain information concerning the nominee and
the proposing stockholder.
The cumulative effect of the restrictions on a potential acquisition of us that are contained in our Articles of Incorporation and Bylaws, and
federal and Washington law, may be to discourage potential takeover attempts and perpetuate incumbent management, even though certain
stockholders may deem a potential acquisition to be in their best interests, or deem existing management not to be acting in their best
interests.
149
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
December 31, 2022
Parent
Banner Corporation
Subsidiaries
Banner Bank
(1)
Banner Capital Trusts V, VI, and VII
(1)
Springer Development, LLC
(2)
Community Financial Corporation
(2)
Northwest Financial Corporation
(2)
Greater Sacramento Bancorp Statutory Trust II
(1)
Mission Oaks Statutory Trust I
(1)
(1) Wholly-owned by Banner Corporation.
(2) Wholly-owned by Banner Bank.
Percentage of
Ownership
Jurisdiction of State of
Incorporation
100 %
100 %
100 %
100 %
100 %
100 %
100 %
Washington
Delaware
Washington
Oregon
Washington
Delaware
Delaware
150
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-239159) and Form S-8 (No.
333-195835 and No. 333-224693) of Banner Corporation and Subsidiaries (the “Company”), of our report dated February 21,
2023, relating to the consolidated financial statements of the Company and the effectiveness of internal control over financial
reporting of the Company, appearing in this Annual Report on Form 10-K of the Company for the year ended December 31,
2022.
EXHIBIT 23.1
/s/ Moss Adams LLP
Spokane, Washington
February 21, 2023
151
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF BANNER CORPORATION
PURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES ACT OF 1934
I, Mark J. Grescovich, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Banner Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
ablishing and maintaining disclosure controls and procedures (as
ined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
The registrant’s other certifying officer and I are responsible for est
def
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the
equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
February 21, 2023
/s/Mark J. Grescovich
Mark J. Grescovich
Chief Executive Officer
152
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER OF BANNER CORPORRATION
PURSUANT TO RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES ACT OF 1934
I, Peter J. Conner, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Banner Corrporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial infformation included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as off, and for, the periods presented in
this report;
The registrant’s other certifying officer and I are responsible for estaablishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material infformation relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonaable assurance regarding the reliaability of financial reporting and the
preparation of financial statements for external purrposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonaably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the
equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonaably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
infformation; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Febrruary 21, 2023
/s/ Peter J. Conner
Peter J. Conner
Chief Financial Officer
153
EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF BANNER CORPORRATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certif
to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Annual Report on Form 10-K, that:
cer of Banner Corrporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
city as an offi
in his ca
y
pa
•
•
the report fully complies with the requirements of Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended,
and
the infformation contained in the report fairly presents, in all material respects, the Company’s financial condition and results of
operations as of the dates and for the periods presented in the financial statements included in such report.
Febrruary 21, 2023
Febrruary 21, 2023
/s/ Mark J. Grescovich
Mark J. Grescovich
Chief Executive Officer
/s/ Peter J. Conner
Peter J. Conner
Chief Financial Officer
154
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Harnessing our momentum
NET INCOME (MILLION)
$200
$201.0
$195.4
$150
$136.5
$146.3
$115.9
$100
$50
$0
RETURN ON AVERAGE ASSETS
1.4%
1.24% 1.18%
1.29%
1.22%
0.83%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
2018
2019
2020
2021
2022
2018
2019
2020
2021
2022
NET INCOME AVAILABLE
to common shareholders per diluted share
MOBILE DEPOSITS (MILLION)
all consumer, business and commercial
$5.76 $5.67
$4.15 $4.18
$3.26
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
$923.8
$731.1
$1000
$800
$600
$400
$200
$0
$458.5
$199.1
2018
2019
2020
2021
2022
2019
2020
2021
2022
LOAN PORTFOLIO
11%
7%
8%
16%
42%
$10.15 B
12%
6%
15%
25%
CRE
8% Owner Occupied CRE
16% Investment Properties
12% Small Balance CRE
6% Multifamily
Construction
Commercial/Agriculture
Consumer
Residential
Loans are our most significant and generally highest yielding earning assets.
We continue to implement strategies designed to capture more market share
and achieve increases in targeted loans.
LOAN ORIGINATION VOLUME
(MILLION) excluding loans held for sale
$5,000
$4,500
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
$4,421
$4,620
$4,393
$545
$359
$90
$1,035
$1,935
$38
$419
2020
2021
2022
Consumer
Commercial business
One- to four- family residential Construction and land
Multifamily real estate
Agricultural business
Commercial real estate
SBA PPP
Our Value Proposition
Connected. Knowledgeable. Responsive.
It’s not only what we do, it’s how we do it—
with relentless effort.
Our Vision Statement
We strive to be the bank of choice in the markets
we serve. We are committed to being the best
provider of financial services in the West.
VALUE
PROP
VISION
MISSION
VALUES
Our Mission Statement
Banner Bank is a dynamic, full-service financial institution operating safely and
profitably within a framework of shared integrity.
Working as a team, we will deliver superior products and services to our valued
clients. We will emphasize strong client relationships and a high level of community
involvement. We will provide a culture which attracts, empowers, rewards and
provides growth opportunities for our employees. Our success will build long-term
shareholder value.
Values
“Do the Right Thing.”
This means we believe in:
• Honesty and Integrity
• Mutual Respect
• Quality
• Trust
• Teamwork
• Accountability
DIRECTORS
Roberto R. Herencia
(Chairman)
Connie R. Collingsworth
Mark J. Grescovich
John R. Layman
Kevin F. Riordan
Ellen R.M. Boyer
Margot J. Copeland
David A. Klaue
John Pedersen
Terry S. Schwakopf
Paul J. Walsh
(Photo unavailable)
EXECUTIVE OFFICERS
Mark J. Grescovich, President and Chief Executive Officer
Janet M. Brown, EVP, Chief Information Officer
James P.G. McLean, EVP, Commercial Real Estate
Lending Division
Peter J. Conner, EVP, Chief Financial Officer
James M. Costa, EVP and Chief Risk Officer
James P. Garcia, EVP, Chief Audit Executive
Kayleen R. Kohler, EVP, Human Resources,
Chief Diversity Officer
Kenneth A. Larsen, EVP, Mortgage Banking
Sherrey Luetjen, EVP, General Counsel
Cynthia D. Purcell, EVP, Chief Strategy and
Administration Officer
M. Kirk Quillin, EVP, Chief Commercial Banking
Executive
James T. Reed, Jr., EVP, Commercial Banking
Jill M. Rice, EVP, Chief Credit Officer
Thank you to Kenneth W. Johnson, EVP, Operations,
who retired in 2022.
Director and Officer information is as of December 31, 2022.
Corporate Headquarters
10 South First Avenue
PO Box 907
Walla Walla, WA 99362-0265
509-527-3636
800-272-9933
Website: bannerbank.com
Email: bannerbank@bannerbank.com
Subsidiaries
Banner Bank – bannerbank.com
Community Financial Corporation
Transfer Agent and Registrar
Computershare Trust Company, N.A.
150 Royall St., Suite 101
Canton, MA 02021
Independent Public Accountants
and Auditors
Moss Adams LLP
805 SW Broadway, Suite 1200
Portland, OR 97205
Special Counsel
Breyer & Associates PC
8180 Greensboro Drive, Suite 785
McLean, VA 22102
Annual Meeting of Shareholders
10 a.m. Pacific Time, Wednesday, May 24, 2023
The Annual Meeting of Shareholders will be conducted
solely online via live webcast.
You can attend by visiting:
www.meetnow.global/MLDTADP
No password is required, though to vote or ask a
question, shareholders must provide their unique
control number.
Dividend Payments
Dividend payments are reviewed quarterly by the
board of directors and, if appropriate and authorized,
typically would be paid in the months of February, May,
August and November. To avoid delay or lost mail, and
to reduce costs, we encourage you to request direct
deposit of dividend payments to your bank account.
To enroll in the Direct Deposit Plan, call the Company’s
Investor Services Department at 800-272-9933.
Dividend Reinvestment and
Stock Purchase Plan
Banner Corporation offers a dividend reinvestment
program whereby shareholders may reinvest all or a
portion of their dividends in additional shares of the
Company’s common stock. Information concerning
this optional program is available from the Investor
Services Department or from Computershare Investor
Services at 800-697-8924.
Investor Information
Shareholders and others will find the Company’s
financial information, press releases and other
information on the Company’s website at
www.bannerbank.com. There is a direct link from the
website to the Securities and Exchange Commission
(SEC) filings via the EDGAR database, including Forms
10-K, 10-Q and 8-K.
Shareholders May Contact:
Investor Relations, Banner Corporation
PO Box 907
Walla Walla, WA 99362
Or call 800-272-9933 to obtain a hard copy of these
reports without charge.
2022
Banner Corporation
Annual Report
bannerbank.com
Let’s create tomorrow, together.
Corporate Headquarters
10 South First Ave.
PO Box 907
Walla Walla, WA 99362-0265
509-527-3636
800-272-9933
bannerbank@bannerbank.com
SKU: 001CSN53C0
Member FDIC